Bradbury v British Broadcasting Corporation [2012] EWHC 1369 (Ch) (23 May 2012)

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England and Wales High Court (Chancery Division) Decisions

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Cite as: [2012] EWHC 1369 (Ch)

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		Neutral Citation Number: [2012] EWHC 1369 (Ch)
		Case No: CH/2011/0648

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
ON APPEAL FROM THE PENSIONS OMBUDSMAN

Royal Courts of Justice
Strand, London, WC2A 2LL

23/05/2012

B e f o r e :

MR JUSTICE WARREN
____________________

Between:

	JOHN BRADBURY	Appellant
	- and -
	BRITISH BROADCASTING CORPORATION	Respondent

____________________

Andrew Stafford QC and Nicholas Randall (instructed by Walkers Solicitors) for the Appellant
Robert Ham QC (instructed by Olswang LLP) for the Respondent
Hearing date: 17th January 2012
____________________

HTML VERSION OF JUDGMENT
____________________

Mr Justice Warren :

Introduction and Background

This is an appeal by Mr John Bradbury against a determination ("the Determination") of the Pensions Ombudsman ("the PO") dated 24 October 2011 by which he dismissed Mr Bradbury's complaint dated 11 January 2011.

Mr Bradbury is employed by the respondent ("the BBC") as a member of the BBC Philharmonic Orchestra. He is a member of the BBC Pension Scheme ("the Scheme"). The Scheme has four Sections:

a. The Old Benefits Section: this provides benefits calculated as a proportion of a member's final salary. It has been closed to new members since 30 September 1996.

b. The New Benefits Section: this was created for eligible employees who joined the BBC on or after 1 October 1996. The benefits provided are also based on final salary but the benefits differ in some respects from those of the Old Benefits Section.

c. The CAB 2006 Section ("CAB 2006"): this provides defined benefits but unlike the Old and New Benefits Sections, it is a "career average" scheme; that is to say that a member's pension on retirement is a proportion of his earnings in each year of employment (revalued over the period from that year until retirement) and is not based simply on final salary. The CAB 2006 Section has been closed to new entrants since 30 November 2010.

d. The CAB 2011 Section ("CAB 2011"): this is also a "career average" scheme. It commenced on 30 November 2010 and is open to new entrants, provided that they joined before 1 January 2012.

When he made his complaint, Mr Bradbury was a member of the New Benefits Section. He has since elected to join CAB 2011 for his future service.

It is said by Mr Robert Ham QC, who appears for the BBC, that like many other sponsors of defined benefit pension schemes, the BBC has been faced with a growing need to reduce its pension liabilities. The actuarial deficit in the Scheme is large: it was around £2 billion in April 2009 and £1.6 billion in June 2010. The BBC had agreed with the trustee of the Scheme, BBC Pension Trust Ltd ("the Trustee") to repair the Scheme deficit over a period of 11 years. To have continued the arrangements in place without any changes to benefits and/or member contributions would have required a significant increase in contributions from the BBC itself. Mr Ham says that this would have represented an increase in contributions from the equivalent of 3.5% of the licence fee to around 10%. He submits on the basis of what has been said by the BBC in correspondence before the PO, that the BBC believed that this level of funding was unaffordable and would damage its ability to maintain the quality and range of services to the licence fee payer. Mr Ham is no doubt correct to say that there was and is a large deficit, and his identification of the percentages of the licence fee in his forensic appeal to the interests of the licence-fee payer may be more or less accurate. Whether, and if so precisely how, the belief which he ascribes to the BBC was actually held by it is not something which was investigated by the PO since it had not been put in issue and is not something which I can take account of as a matter of established fact.

Nonetheless, Mr Andrew Stafford QC, who appears with Mr Nicholas Randall for Mr Bradbury, accepts that the BBC formed the view, for one reason or another, that it was faced with a need to reduce its pension liabilities. That is why it decided to close CAB 2006. That is also why it decided, as it did, to limit the extent to which any pay rise would count as pensionable pay for the remaining active members of the Old Benefits Section, the New Benefits Section and CAB 2006. That limit imposes a 1% cap on increases in pensionable pay so that, whatever pay increases a member of those sections of the Scheme might receive, the increase in pensionable pay would be limited to 1% in each year.

These changes came about following a consultation process with members and trade unions between July and November 2010. The BBC also informed the Trustee of the proposals it was making and worked with it. Part of the proposals were the subject of what has been referred to as the ACAS Agreement negotiated between the unions and BBC management and set out in Part 5 of the Appendix to the 45^th Deed of Variation dated 30 March 2011 ("the 2011 Deed and Rules"). Mr Ham informs me that the only material before the Court (and the only material which was before the PO) which discloses the existence of such negotiations is the ACAS Agreement itself, the terms of which were appended to the 2011 Deed and Rules as Part 5 of the Appendix at p 137.

Part 5 of the Appendix refers to negotiations between the joint unions and BBC Management at ACAS on 30 November 2010 where agreement was reached in principle to certain words to resolve the pensions dispute, clearly a reference to the way in which the BBC should be able to control its liabilities under the Scheme. The ACAS Agreement appears to be principally concerned with the terms of CAB 2011 and the level of guaranteed increases to the pension building blocks. It is not clear from the provisions of the ACAS Agreement what, if anything, had been agreed or even discussed about how pay increases, would be dealt with for pension purposes in the future so far as concerned Members who remained members of their existing Sections of the Scheme. Mr Ham has nonetheless referred me to the ACAS Agreement: he has done so simply to illustrate the limitations on the factual enquiry carried out to date and to show that there is no material on which the PO or the Court could reasonably make a judgment on whether the BBC was acting in any way improperly vis a vis the alterations effected by the 2011 Deed and Rules.

Whatever was agreed at the meeting on 30 November 2010, it does appear that the outcome of the consultation announced in November 2010 was that Members were to be offered a number of options:

a. To remain in their current section of the Scheme but with any future pay awards limited to 1% for pension purposes.

b. To opt out of their current section and a join a new career average section of the Scheme (in the event, CAB 2011) in which any future pay awards would not be subject to the 1% cap. Mr Bradbury eventually elected for this option along with about 8,000 other members.

c. To opt out of the Scheme altogether and to join the BBC Life Plan, a defined contribution arrangement.

Implementation of the proposals

By the 2011 Deed and Rules, the BBC and the Trustee closed the existing career average section, CAB 2006, to new members, although that section remained in existence as a separate section for existing members who elected not to opt out. The 2011 Deed and Rules also created a new career average section, CAB 2011. Option b above was implemented: Section 2 of the Rules provided for an Employee (being a member of the Old Benefits Section, the New Benefits Section or CAB 2006) to be admitted to Membership of CAB 2011 provided that the member elected to opt out of the previous category of membership and made an application to join CAB 2011 prior to 1 January 2012 (although the BBC was able to waive all or any of these eligibility conditions in individual cases).

Option a above was not reflected in any amendment to the pre-existing trust deed and rules of the Scheme so that one finds nothing in the Rules expressly limiting the amount of any pay increase which counts for pension purposes. Mr Ham submits that it was not necessary to make any such amendment, for two reasons. The first is that the Rules then (and now) in force define "Pensionable Salary" (that is to say, the amount used in the formula for the calculation of the emerging pension) by reference to "Basic Salary" which is in turn defined as

"the amount determined by the BBC as being an Employee's basic salary or wages payable under the terms of his or her Continuing or Fixed Term Contract....."

Mr Ham submits that the words "determined by the BBC" are effective to allow the BBC to determine what part of an Employees' remuneration is to count as his basic salary or wages so that the BBC is able to limit the extent to which any increase in remuneration is pensionable. Unsurprisingly, Mr Stafford does not agree with that. I will consider the point further in due course.

The second reason is that it was decided by the BBC that any increase to pay would be offered on terms that the increase would, for pension purposes, be limited to 1%. If a member did not agree to those terms, he would not get a pay increase (at least, not one above the 1%). If he did agree, then it said by the BBC that the agreement would be binding so that the Trustee should give effect to it. Reliance is placed on South West Trains v Wightman [1998] PLR 183 ("SWT") and Trustees of the NUS Officials and Employees Superannuation Fund v Pensions Ombudsman [2002] PLR 93 ("the NUS case").

On 11 January 2011, Mr Bradbury made his complaint to the PO. In his application form, he complained as follows:

"The BBC has changed the definition of Pensionable Salary without consulting the Trustees. My 13 years of contributions were made in good faith that my pensionable salary was my basic pay (please see accompanying letter).

The new definition will injure the contributions that I have made and I will probably lose thousands of pounds (please see accompanying letter).

I would like the BBC to consult with the Pension Scheme Trustees before acting on this proposal."

In the accompanying letter, Mr Bradbury complained

"that the BBC have proposed a substantive change to the promised return on my pension contributions to date, without reference to the Scheme Trustee. I have been contributing to the BBC Pension Scheme for 13 years under a contract that gave a specific and plain definition of pensionable salary. This definition was reaffirmed in the 43^rd Deed of Variation of 21^st December 2009. The BBC is now proposing a new definition of pensionable salary without consulting the Trustees."

Mr Bradbury enclosed a copy of the definition of Pensionable Salary which applied when he joined the scheme: I have not seen this since it was not included in the appeal bundle. He also set out the definition in the 43^rd Deed of Variation which was in the following terms:

"Pensionable Salary" means a Member's Basic Salary from the Employer. It includes London weighting and such other regular additions to basic salary as the BBC may determine from time to time. It does not include any other allowance, bonus, overtime earnings or temporary or fluctuating emoluments not specifically recognised by the BBC as being included in Pensionable Salary."

This definition is identical to the current definition in the 2011 Deed and Rules: see paragraph 37 below.

I have not seen the 43^rd Deed of Variation, but it has not been suggested that Mr Bradbury's quote is in any way inaccurate. He did not, unfortunately, set out the definition of "Basic Salary" used in the definition of Pensionable Salary. However, it appears that a definition of Basic Salary had been introduced by a deed amendment dated 2 June 2000 with a revised definition (introduced for salary sacrifice purposes) incorporated by a deed of amendment dated 23 October 2006. There is nothing to suggest that that definition was not in the same terms as the current definition also set out in paragraph 37 below.

It would appear that the definitions of "Pensionable Salary" and "Basic Salary" in the 43^rd Deed of Variation replaced a single definition of "Pensionable Salary". I have been shown a version of that which is to be found in the 30^th Deed of Variation dated 12 August 1996. The definition reads as follows:

"Pensionable Salary" means a Member's or Life Assurance Member's basic salary or wages from the Employer. It includes London weighting and such other regular additions to basic salary as the BBC may determine from time to time. It does not include any other allowance, bonus, overtime earnings or temporary or fluctuating emoluments not specifically recognised by the BBC as being included in Pensionable Salary."

In this definition, basic salary (with lower case "b" and "s") was not a defined term.

Mr Bradbury also enclosed with his letter a copy of the proposed new definition of Pensionable Salary which he said was taken from the BBC document "Proposed changes to the BBC Pension Scheme", a document which I have not seen and, so far as I am aware, was not placed in its entirety before the PO. I do not, in fact, think that this was a new definition to replace the definition in the then current deed and rules; rather, it was his way of describing the proposal to cap pensionable pay increases at 1%. He described the new definition as "a contrivance and a construct with which they are attempting via an artificial contractual device, to abrogate responsibility for their obligations agreed under trust". He suggested that the meaning of the old definition, on the basis of which he had joined the Scheme and contributed to it over the years, was clear and unambiguous, with "basic salary" being a term which did not bear redefinition. He stated that he

"understood that the BBC has every right to change the terms under which future contributions are made, but I don't accept that they can change the terms under which I have already made contributions, without substantive and formal consultation with the Scheme Trustees, with whom I have entrusted my contributions…..

…..

The process with which the BBC has undertaken its proposed changes to Pension provision is a travesty of trust and decency. The honest, rightful and proper path for such a substantive change to a Scheme definition is for the BBC to go to the Trustees to seek a variation to the pension fund deed."

Pausing there, it is to be noted that Mr Bradbury's complaint as articulated in his application form was that the BBC had changed the definition of Pensionable Salary. The actual change in definition had, however, occurred in 2006; what was proposed in 2011 was that pay increases should be capped at 1% for pension purposes. But what is clear is that he was complaining about the fact that his Pensionable Salary would cease to reflect the whole of his basic pay. And it was to this fact that Mr Bradbury must have been alluding when he complained that "the value of my endowment will almost certainly be artificially undermined. The 1% cap on the growth of pensionable salary will reduce future annuities….". Mr Bradbury would naturally, if I may say so, have seen the proposal as one which ought to have found formal implementation through the Scheme and thus require a rule amendment: there was to be a significant change in his Pensionable Salary which would no longer include the whole of any pay increase, a change from what he was entitled to prior to the introduction of the definition of Basic Salary in 2007. He did not, in that letter, articulate his complaint in precisely that way or in that detail; but it was perfectly apparent that, by the time the PO came to make his decision, that was what Mr Bradbury was saying: see paragraph 30 below. Although his reference to a change in definition was thus muddled and might even be said to be misleading, he cannot, as a lay person, be blamed for that in this technical field. Mr Ham, however, has focused on the complaint relating to a change of definition, submitting that the complaint is without foundation because there has, in fact, been no change. Indeed, the first reason he gives for saying that Mr Bradbury has no cause for complaint is that the BBC was entitled to determine what part of Mr Bradbury's remuneration should count as Basic Salary and thus count as part of his Pensionable Salary. He even says that if there is complaint about the introduction of the new definitions, it is not one which was made, a proposition which it is difficult to square with the contents of Mr Bradley's letter to the PO dated 20 October 2011 (see again paragraph 30 below).

Correspondence followed. On 15 July 2011, Mr Lam, the investigator in the PO's office dealing with the case, wrote to Mr Bradbury. He wrote "further to previous correspondence" which I have not seen; so I do not know precisely on what basis the PO was proceeding. However, Mr Lam identified Mr Bradbury's complaint in this way:

"Essentially your complaint is that [the BBC], your current employer, changed the definition of pensionable salary in the Scheme rules (used for calculating Scheme contributions and benefits payable on retirement from 1 April 2011 onwards) without consulting the Scheme Trustees before doing so."

Mr Lam said that he would ascertain whether the BBC opposed the application; of course it did so. In a letter dated 4 August 2011 to Mr Lam, the BBC identified the complaint as one relating to the introduction of the 1% cap on pensionable pay increases and the complaint that the BBC has changed the definition of Pensionable Salary without consulting the Scheme Trustees. It is stated that there had already been correspondence by the BBC with both Mr Bradbury and the PO, none of which I have seen. The letter then went on to address what the BBC saw as the substance of the complaint. After stating why costs savings were, in its view, necessary and its conclusion that its preferred option was the closure of the CAB 2006 and the imposition of the 1% cap on pensionable pay awards, it then went on to state the BBC's opposition. In particular, it was said that the BBC did not consider the introduction of a 1% cap to pensionable pay to have been subject to a requirement of prior consultation between the BBC and the Scheme trustees. The letter then went on to state that there was no need for consultation because

"the way in which the cap to pensionable pay has been introduced is by the BBC relying on the flexibility under the existing definitions of "Basic Salary" and "Pensionable Salary" in the Scheme rules and not by a formal rule amendment to the trust documentation. "

I shall come, in due course, to consider whether the BBC's interpretation of those definitions is correct.

The letter then referred to SWT but it was not suggested in the paragraph of the letter addressing that decision that the cap could be justified by reference to the approach adopted by Neuberger J. Rather, it was said that the flexibility provided by the definitions obviated the need for consultation with the Trustee and that this formed part of the contractual matter between the member and the BBC. And so it was said that this "reflects the approach taken in [SWT]".

However, what I might term the SWT point (that is to say, that a member can validly contract for a benefit less than the scheme rules apparently provide) was taken by the BBC in referring to the NUS case. It was pointed out that the members were not generally entitled to receive pay increases. But if a pay offer was made and accepted, the acceptance could only be on the basis of the offer made, and if that included a limitation on the amount of the increase which is pensionable, then it was said by the BBC that the limitation would be binding on the member. The letter then proceeded to give the rationale for the BBC's proposals and to describe the consultation process leading to the options which I have described in paragraph 4 above.

Mr Bradbury responded to the BBC's letter in his own letter to Mr Lam dated 25 August 2011. He stated his belief that the BBC had "correctly and fairly summarised the basis of my complaint". He did not, however, restate his complaint that the amendment to the definitions was objectionable, but appeared to have accepted that the starting point for the PO's consideration of his complaint was the 2011 Deed and Rules containing the definition of Basic Salary. As to that, he took the point that the new Rules did not provide the flexibility which the BBC suggested they did provide. As I have said, I will come to the correct interpretation of the definitions in due course.

Mr Bradbury also added that the BBC needed "to prove that its "consultation" was exemplary" and that the process was not in fact window dressing. He gave reasons for saying that the consultation was far from exemplary.

Importantly, he referred to the amending power in the 43^rd Deed of Amendment, setting out the amendment power in Section 18.2. Its terms were the same terms as those found in the 1996 Deed to which I have referred. The power was subject to a number of provisos one of which was that no alteration or modification should

"take effect as regards the Active Members [who included Mr Bradbury at the date of the 2011 Deed and Rules] whose interests are certified by the Actuary to be affected thereby unless ….(a) the Actuary certifies that the alteration or modification does not substantially prejudice the interests of such Members:….."

He described these fetters as "strong and plain". On 6 September 2001, Mr Bradbury wrote again to Mr Lam making the point that the rules which applied when he joined the Scheme did not include a separate definition of Basic Salary. In relation to that, he wrote:

"In my opinion, to add or amend a Definition for the purposes of elucidation or clarification of the Scheme Rules is entirely reasonable, but to introduce an entry within "Definitions" so as to enable a substantive change to the Scheme Rules themselves amounts to Amendment by stealth."

It can be seen that the thrust of his objection was to the change in the way the Scheme was to operate. Whereas previously he had been entitled to benefits pursuant to a definition of Pensionable Salary which included all of his basic salary, the proposal being made by the BBC was that he would be entitled to benefits based on only part of his basic salary. There had been no actuarial certification in relation to that change. Hence he described the case as an "Amendment by stealth".

Next, on 22 September 2011, Mr Lam wrote saying that in his view the complaint could not be upheld. The essential reason for the rejection of the complaint was that the amendments and modifications made by the 2011 Deed and Rules had been certified by the actuary as not substantially prejudicing the interests of Active Members. He does not say so expressly, but it is hard not to conclude that he adopted the BBC's interpretation of the definition of Basic Salary. In any case, he considered that the NUS case was determinative against the complaint. He gave consideration to the question whether Mr Bradbury's accrued rights for the purposes of section 67 Pensions Act 1995 was adversely affected (concluding that they were not) but he did not give an consideration to the actual terms of the amendment power, presumably on the footing that the matter was concluded by the actuarial certification.

Mr Bradbury responded in a long letter dated 20 October 2011 and, as was his right, asked for the case to be reviewed by the PO or his deputy. There is one passage I wish to quote from that letter:

"On 19^th July 2007, a definition of "Basic Salary" was introduced to the 40^th Deed of Variation. Mrs Killick, Head of BBC Pensions, herself states that this was a Deed which "the Trustees entered into and which the Scheme's actuary certified did not substantially prejudice the interests of Active members" (letter of 19^th September 2011, page 3, para 2). The Trustees and the Scheme Actuary read nothing more into this definition than that which could be reasonably deduced – an affirmation of the BBC's right to set its salaries. "Basic Salary" continued to enjoy the same explicit, plain and unalienable meaning on July 20^th 2007 as it did on July 18^th 2007. Indeed if they had suspected then that this definition might be used at a later date in order to justify a prejudice to accrued Members' rights, they would have failed in their Fiduciary responsibilities, and we are all agreed this is not the case. It is of profound importance to my case that we reflect long and hard upon the day back in 2007 that the 40^th Deed was signed. Mrs Killick has now proffered the certificate to prove the Actuary's conclusion." [Mr Bradbury's emphasis]"

I have not been provided with the documents referred to in that passage. The definition of Basic Salary was in fact introduced earlier: see paragraph 16 above and subsequent amendments, including the 2011 Deed and Rules, simply reflect the pre-existing definition.

In the meantime, Mr Bradbury received a letter dated 18 October 2011 from the BBC notifying him of his proposed pay award from the BBC. This followed the general pay review in August. It was, no doubt, a standard form letter and its material terms were as follows:

"Following this year's annual pay review, I am pleased to offer you a pay rise, on the terms set out in this letter. If you accept these terms, your pay will be increased as set out below"

[There then followed a box setting out Mr Bradbury's new salary, his new pensionable salary, which was a lesser amount that his actual salary, and his non-pensionable salary (ie the difference between the two).]

"if you are an active member of the Old Benefits, the Benefits or Career Average Benefits sections of the BBC Pension Scheme ('the Scheme'), the BBC will limit the increase in your pay for pension purposes......(your 'Pensionable Salary' as shown above) to 1% each year (running from 1 April to 31 March). Therefore your Pensionable Salary may be less that your Salary as shown above. The difference between the two figures (if any) is shown as your Non-Pensionable Salary.

If you accept the pay rise on the above terms, you will be deemed to have accepted the increase in your Pensionable Salary to the amount shown above.....and you agree that the Trustees can operate the Scheme on the basis that this figure is your Pensionable Salary....."

Mr Bradbury rejected the offer in a letter dated 21 October 2011, alleging that it would be illegal to agree to it because it would be a breach of section 91 of the Pensions Act 1995 ("section 91") as to which see paragraph 69 below.

The Determination

On 24 October 2011, the Pensions Ombudsman issued the Determination in the form of a letter of that date. The PO wrote that his grounds for dismissing the complaint were essentially the same as Mr Lam's grounds. He said this:

"One limb of your argument is, if I may put it in my own words, that basic salary has its own meaning and it is not open to the BBC to declare that it is something lower for pension purposes. In isolation I might agree with that. But in the context of the proposed future pay increase arrangements, I do not think it is a sustainable line. The point is that on accepting a pay increase you would know exactly that Basic Salary was being declared for pension purposes to be (as you might put it) artificially low. It is open to the BBC to take such an artificial step if you agree to it.

I think, by the way, that would have been the case even without the change to the salary definitions introduced in 2007.

………….

Your other key argument concerns the terms on which you joined the Scheme in the first place..... You argue (based on Courage and IMG) that your interest in the Scheme, which should not be prejudiced, includes the benefits resulting from future salary increases. I do not need to reach a decision on that because no change is being made to the Scheme. I am afraid that I do not accept that as an act in relation to the Scheme the BBC cannot take an approach to pay increases (inevitably with your agreement) that would have similar effect to a change in Scheme rules, even if that change would not be allowed under the rules….."

The PO, in contrast with Mr Lam, seems to have reached his conclusions very much on the approach found in SWT and the NUS case rather than on the basis that the BBC was able to do what it proposed by a straightforward application of the Rules.

What neither Mr Lam nor the PO addressed was the question whether the options offered to Mr Bradley in August 2011 (either viewed in isolation or viewed together with the earlier introduction of the definition of Basic Salary) were consistent with the implied term of trust and confidence and/or the implied term of good faith contained in Mr Bradbury's contract of employment. [I shall refer to these duties in this judgment as "the Implied Duties"].

The 2011 Deed and Rules

The 2011 Deed and Rules provide the following definitions:

a. "Pensionable Salary" means a Member's Basic Salary from the Employer. It includes London weighting and such other regular additions to Basic Salary as the BBC may determine from time to time. It does not include any other allowance, bonus, overtime earnings or temporary or fluctuating emoluments not specifically recognised by the BBC as being included in Pensionable Salary.

b. "Basic Salary" means the amount determined by the BBC as being an Employee's basic salary or wages payable under the terms of his or her Continuing or Fixed Term Contract, but also including from time to time any salary or wages given up by the Employee in return for –

(a) the BBC's scheme known as Smart Pension (as modified from time to time) under which his or her salary or wages is reduced in exchange for the Member ceasing to make contributions to the Scheme under Rule 3.1; or

(b) such other flexible benefit arrangements as the BBC from time to time designates.

Those provisions repeat the earlier definitions. They divide into two separate definitions what had previously been found in a single definition of "Pensionable Salary" which previously applied to the Scheme and which I have set out at paragraph 17 above.

The issues of law

Mr Bradbury appeals against the Determination. Mr Bradbury contends that the following four issues of law arise for decision by me:

a. Was the BBC's conduct in seeking to impose a 1% cap on increases to pensionable salary through the mechanism of Mr Bradbury's pay award contrary to the trust deed and rules of the Scheme?

b. Was such conduct contrary to section 91 of the Pensions Act 1995?

c. Was such conduct a breach of the Implied Duties?

d. Was the BBC's cumulative conduct in seeking to impose a 1% cap on increases to pensionable salary through the mechanism of Mr Bradbury's pay award such as to amount to maladministration for the purposes of the Pension Schemes Act 1993?

Mr Bradbury seeks:

a. a declaration that BBC acted unlawfully in seeking to impose a 1% cap on increases in pensionable salary through the mechanism of Mr Bradbury's pay award;

b. a declaration that the BBC is guilty of maladministration in seeking so to impose such a cap; and

c. an order remitting the matter to the PO to determine the complaint in line with the guidance provided in the court's judgment.

In the period leading up to the hearing before me, the BBC took various procedural points which are reflected in Mr Ham's skeleton argument. After some debate, these were not pressed before me and I do not propose to go into them. I turn now to deal with the four issues identified.

Issue 1: Was the BBC's conduct in seeking to impose a 1% cap on increases to pensionable salary through the mechanism of Mr Bradbury's pay award contrary to the trust deed and rules of the Scheme?

Mr Ham suggests that this issue is academic because Mr Bradbury has now elected to opt out of the New Benefits Section and to join CAB 2011. It may be academic as a self-contained issue. But it feeds into Issues 3 and 4 so that I need to deal with it.

The starting point for the analysis is the Scheme documentation. I think it is right to start with the old definition of Pensionable Salary since that forms the background to the complaint. Under that definition, it included "basic salary or wages" which was not a defined term. Basic salary and wages were to be contrasted with the other sorts of remuneration mentioned in the definition – London weighting, such other regular additions to basic salary as the BBC may determine from time to time, other allowances, bonuses, overtime earnings and temporary or fluctuating emoluments – some of which were and some of which were not included within the definition of Pensionable Salary. There is unlikely to have been any difficulty about what remuneration fell within "basic salary or wages", all of which would have been pensionable. The BBC had no discretion to determine what part of basic salary or wages fell within the definition of Pensionable Salary. Suppose, for instance, that an employee had basic pay of £40,000 pa in one year; the BBC could not say, in relation to the next year, that only £35,000 would be basic pay and the balance should be categorised as some sort of "special" pay. That is not to say that a genuine re-categorisation of the duties of an employee and the pay which he receives could not be effected. Ignoring any employment law issues, the employee might be told that his contractual hours were to be reduced so that his basic pay would be reduced eg to £35,000 pa, but he might be told also that it would be hoped to provide overtime in respect of which he might expect additional overtime earnings of £10,000 pa, thus giving him a hoped-for, but not guaranteed increase in total remuneration of £5,000 pa. But if a member is simply given a pay increase equal to a percentage of his current basic pay, it seems to me that, without more, it cannot sensibly be contended that the increase would not be "basic salary or wages" just as much as the pay on which the increase was based.

The change of definitions in 2006 may therefore be significant. The definition of "Pensionable Salary" was altered by removing the words "basic salary or wages" and replacing them with "Basic Salary", a defined term including within its scope not all "basic salary or wages" as hitherto but only "the amount determined by the BBC as being an Employee's basic salary or wages….". I can well understand that the introduction of a power for the BBC to determine what is and is not basic salary or wages would be sensible – and probably not open to objection – if the power were restricted to allowing the BBC to decide, in cases of doubt, whether a particular element of an employee's remuneration is basic salary or some other element of pay. But if the power went further, its introduction could be open to serious objection, as I will explain in a moment.

What power, then, does the definition of Basic Salary in fact allow? The BBC does not regard it as restricted to dealing with borderline or doubtful cases. It considers that it has the power to determine whether or not an amount payable by way of remuneration is to fall within the definition of Basic Salary whether or not it would have been "basic salary or wages" under the old definition. It is the power to do so which Mr Ham prays in aid as his first submission in order to justify a limit on pensionable pay increases to 1%.

Consider then the position of a member who, immediately before the introduction of the 2006 amendments was earning a basic salary within the meaning of the old definition of Pensionable Salary of an identified amount, say £40,000 pa. He receives pay rises in following years. Then, for the pay round following the introduction of the 2011 Deed and Rules, he is told that he can have an increase in pay of 2.5%; but he is told that only 1% will be pensionable, that is to say that his Basic Pay within the new definition includes his old basic pay and an increase of 1% on it but with the other 1.5% being excluded from the definition of Basic Salary. Whatever it may be that the BBC can do as a matter of the definition of Basic Salary, it seems to me that the £40,000 pa remuneration fell within the concept of "basic salary or wages" after the introduction of the 2006 amendments just as much as it did before. Further, the whole increase in pay – 2.5% – forms part of "basic salary or wages" after those amendments just as it would have before.

It seems to me, therefore, that if the BBC is entitled, as a matter of construction of the definition of Basic Salary, to determine that only part of a pay increase is to be pensionable, it has to recognise that only part of what is in fact basic salary or wages is to count for pension purposes. In other words, "Basic Salary" may not include 100% of basic salary or wages; or, to put the same point another way, notwithstanding that an amount of pay may be "basic salary or wages", the BBC is entitled to determine an amount of "basic salary or wages" which is different from the amount of the actual "basic salary or wages".

That might be thought to be a surprising result. But if it is correct, so that it is permissible for the BBC as a matter of construction of the definition of Basic Salary to determine that part of a pay increase shall fall outside the definition of Basic Salary, it follows, logically, that it could determine that only part of the pre-existing pay should count as Basic Salary. In other words, it could (subject of course to employment law issues) determine that only £35,000 pa of the employee's pay should fall within the definition of Basic Salary.

The power of amendment prior to the 2011 Deed and Rules: On the footing that the BBC is correct in its construction, how did this change from the old provisions come about? So far as it is possible to tell from the various versions of the governing documentation which I have seen, the power of amendment has been in materially the same terms for many years. In particular, the power of amendment under which the new definitions were introduced in 2006 was materially the same as that which was utilised to introduce the 2011 Deed and Rules. The power was subject to a number of provisos including, so far as material, a requirement that no such alteration or modification shall

"take effect as regards the Active Members [who included Mr Bradbury at the date of the 2011 Deed and Rules] whose interests are certified by the Actuary to be affected thereby unless ….(a) the Actuary certifies that the alteration or modification does not substantially prejudice the interests of such Members:….."

It is to be noted that the actuary gave the necessary certification both in relation to the 2006 amendments (see Mr Bradbury's letter referred to at paragraph 30 above) and in relation to the 2011 Deed and Rules (see recital (G)). If the definition of "Basic Salary" has the meaning for which the BBC contends, it is not entirely easy to see how the Actuary could have certified that the alteration in 2006 did not substantially prejudice the interests of Active members since the BBC could, in theory, reduce the amount of Basic Salary from one year to the next, and thus reduce the amount of the emerging pension on retirement in respect of years of employment prior to the amendment. But even if the idea that there could be a reduction in Basic Salary is to be rejected, it may well be the case that the "interests" of an Active Member in respect of past service include the right to an emerging pension when he retires based on basic salary at the date of his retirement under the pre-existing definition of Pensionable Salary. To introduce a discretion for the BBC to exclude part of basic salary, once the 2006 amendments had been made, from Pensionable Salary through operation of the definition of Basic Salary would be detrimental to those "interests" acquired in respect of past service and require actuarial certification.

In that context, the impact of section 67 Pensions Act 1995 (in its current amended form) on the amendment to the definition of Pensionable Salary coupled with the introduction of the definition of Basic Salary was not raised in argument and I do not address it in this judgment. There is no reason to think that the proposal to cap pay increases at 1% of pension purposes would give rise to any concern in relation to section 67. But whether that is so in relation to the 2006 amendments is another matter.

In contrast, if the definition of Basic Salary is restricted so as to enable the BBC only to deal with borderline or doubtful cases, there would be no difficulty about certification if it were necessary at all.

At this stage, I want to consider what Mr Bradbury might have been entitled to as a matter of construction of the 2011 Deed and Rules. Whichever is the correct meaning of the definition of "Basic Salary", there has to be a pay increase in excess of 1% before the issue arises as a practical matter. Although Mr Bradbury was offered a pay increase in excess of 1% (subject to the 1% cap for pension purposes if he remained in the New Benefits Section), he never in fact accepted that offer while he was a member of the New Benefits Section. But if he had accepted it, he would have had to take the offer in its entirety; he could not pick and choose. Accordingly, if he had accepted it, he would have been bound, on the face of it, to accept that his pensionable salary would be subject to the 1% cap. Reflecting the way in which it was put by Lightman J at [16] and [17] of his judgment in the NUS case, for there to be any increase in salary, it is necessary to discover an express or implied agreement between Mr Bradbury and the BBC for such an increase. Mr Bradbury must establish a contractual entitlement. The BBC has made an offer to him with two integral and interdependent elements, namely an increase in salary and the provision about pension entitlement. The terms cannot be severed. It was not open to him to accept one and not the other. He could not accept the increase without agreeing the terms as to its treatment for pension purposes. In any event, he refused the offer.

Would such an agreement have been binding? Mr Stafford submits on behalf of Mr Bradbury that the PO appears to have accepted the BBC's contention that SWT and the NUS case are authorities for the proposition that, regardless of the underlying rules, an employer is free to alter the definition of pensionable salary by an external contract. He submits that this was an error of law on the part of the PO and that it is only in very limited circumstances that an extrinsic contract can be used to override the Rules, circumstances which did not obtain in the present case.

To deal with this submission, I need first to look at SWT. In that case, the employer wished to rationalise the pay of drivers and other employees. It wished to pay drivers about £25,000 pa with many extra elements of remuneration being abolished. Although that figure would, strictly, be the level of his "Pay" (defined as the rate of pay per annum in the case of an employee remunerated at a fixed rate) on which pensions were based, the employer wanted to restrict pensionable pay to £18,000 pa. That result was agreed to by the unions representing members. It was held that a collective agreement could override the provisions of a pension scheme deed, even if the deed was on the face of it more favourable. It follows, of course, that an express and clear agreement made with an individual employee would have been equally effective to override the provisions of a scheme.

In support of his submission that the PO was in error as a matter of law in relation to this aspect of the case, Mr Stafford refers to Re IMG Pension Plan; HR Trustees Ltd v German and International Management Group (UK) Ltd [2009] EWHC 2785, [2010] PLR 23 a case concerning the IMG Pension Plan and which I will refer to as IMG. This case was heard by Arnold J at first instance. Although his decision was overturned in part by the Court of Appeal (see [2010] EWCA Civ 1349, [2011] PLR 11), what Arnold J said about extrinsic contracts in [172] to [174] of his Judgment was not subject to any criticism. In IMG, the amending power, found in clause 7i, allowed the Trustee to amend the scheme by a declaration under hand and seal or by written declaration; but no amendment "was to have the effect of reducing the value of benefits secured by contributions already made". The amendment under challenge was the conversion of the scheme from a defined benefit scheme to a defined contribution scheme in circumstances where even accrued rights to deferred benefits had been converted.

In IMG, the existing members of the scheme contended that there was a fundamental difference between that case and SWT. In the latter it was not suggested that enforcing the contract would be contrary to the terms of the trust. Arnold J observed at [172] that

"On the contrary, Neuberger J was inclined to accept that the trustee could and should give effect to the contract even without the amendment. One of his reasons for inclining to that view was that the extrinsic contract in that case only affected the salary to which the drivers were to be treated as entitled for the purposes of calculating their pension, which the trustees would have had to look outside the rules of the section for anyway: see South West Trains at [108]."

In support of their argument, the Existing Members contended that there was no informed consent on their part which would preclude them from asserting a breach of trust. Arnold J accepted the arguments saying

"It is one thing to hold that an extrinsic contract may be enforced to supplement a trust deed where there deed does not contain any contrary provision. It is quite another so say that an extrinsic contract may override contrary provisions in a trust deed unless the extrinsic contract amount to consent on the part of the beneficiaries."

Those comments were directed at a case where the extrinsic contract did not amount to consent on the part of the beneficiaries, although it is not entirely clear what a contract without consent could be. Perhaps it means a contract where there is no vitiating element rendering it voidable. The Judge said nothing about a case where there was informed consent, whether or not the deed contains a contrary provision.

On the facts of IMG, Arnold J was not satisfied that the beneficiaries did consent, giving six reasons for that conclusion:

a. They were unaware of the terms of clause 7(i).

b. They received no advice in relation to it.

c. It was not clearly explained to them what was happening to their final salary benefits.

In particular

d. They were not told how the transfer value and additional special contributions would be calculated and the assumptions which would be employed.

e. They were not given any real choice about whether or not to consent.

f. They received the impression that they would not be adversely affected by the change.

In the case before me, the situation is very different. First of all, as in SWT, the factor identified by Arnold J in the passage which I have set out at paragraph 57 above, which was present in SWT but absent from IMG, is present in the case before me. Secondly, none of the six factors set out in paragraph 60 above relied on by Arnold J (or anything like them) can be found in the case before me, with one possible exception. That possible exception is the fifth factor in relation to which Mr Stafford suggests that Members had no real choice about whether or not to consent.

As to that, I would accept that the BBC ought not to be able to rely on a contract between it and a Member of the Scheme, the imposition of which would have given rise to a breach of any of the Implied Duties. Whether there has been any breach of those duties is the third issue identified in paragraph 39 above. In contrast, if the BBC would not have been in breach of any of the Implied Duties in offering a choice to Members between, on the one hand, remaining in the New Benefits Scheme without a pay rise and on the other hand, joining CAB 2011, I do not consider that there is anything in the point which Mr Stafford makes.

I therefore conclude that, subject to (a) the question of breach of the Implied Duties and (b) the effect of section 91 Pensions Act 2004, an agreement by an Active Member of the Scheme to accept a pay rise on the basis that only part of it is to be pensionable, would be binding on the Member concerned. The answer to Issue 1 is that the BBC's conduct was not contrary to the terms of the 2011 Deed and Rules in the sense that an agreement to impose the 1% cap by agreement would be effective notwithstanding the provisions of the 2011 Deed and Rules.

That conclusion makes it unnecessary to consider further the question whether the BBC is correct in its interpretation of the definition of Basic Salary. I nonetheless state my own view which is that the construction for which the BBC contends is not correct. Even reading the definition of Basic Salary in the 2011 Deed and Rules in isolation, I do not consider that it gives the BBC the wide discretion which it claims to have. The BBC's favoured interpretation draws no distinction between past service and future service. Thus, excluding an element of basic pay from Basic Salary will impact on the emerging benefit in respect of past service just as much as future service when the member retires or leaves service. I would expect to find clear words in a provision which is said to confer a power to achieve that result, words which are not in my view to be found in the definition of Basic Salary.

But as I see it the BBC's interpretation is more extreme that that. Once it is accepted that the BBC can restrict Basic Salary so as to exclude pay increases over and above the cap of 1%, I can see no reason why, as matter of construction of the definition, the BBC should not be able to exclude from Basic Salary part of a salary which, to date, has formed part of Basic Salaryy. For example, a member earning £40,000 pa this year may earn £40,000 next year; but his Basic Salary could be reduced from £40,000 to £35,000. Now, it may be that there are constraints on how the BBC could actually exercise its discretion and it may be that such a reduction would be a breach of the Implied Duties. I do not, therefore, say that it would be impossible to introduce a Rule to that effect. But it would be very surprising, to my mind, if the BBC should have such a discretion. It would require the clearest of words if such a discretion is to be found, words which again are not in my view to be found in the definition of Basic Salary.

In any case, the definition is not to be construed in isolation. It is right to consider the pre-existing rules and to consider what the 2011 Deed and Rules mean in the light of the scope of the amending power which first introduced in 2006 the definition of Basic Salary and the amendment to the definition of Pensionable Salary. Viewed against the requirement for actuarial certification, the construction for which Mr Bradbury contends is in my judgment to be preferred to that for which the BBC contends.

In case it is said that the amendments to the definitions did not adversely affect the interests of Active Members because it only confers a discretion, I would say this: A subsequent exercise of the discretion would not be an alteration or modification pursuant to the power now contained in section 19.2 of the 2011 Deed and Rules. Certification would not be required. And yet the combined result of the 2006 definition changes (pursuant to the amending power) and the exercise of the discretion would be to bring about a result which ought, in principle, to be subject to the certification requirements but would not in fact be so subject. That consideration supports my rejection of the BBC's approach to the interpretation of Basic Salary.

Issue 2: Was the BBC's conduct in seeking to impose a 1% cap on increases to pensionable salary through the mechanism of Mr Bradbury's pay award contrary to section 91 of the Pensions Act 1995?

Mr Ham submits that this issue, too, is academic since Mr Bradbury rejected the BBC's offer and did not, in fact, ever agree to limit his salary. However, this issue like the first issue, feeds into the question whether the BBC was in breach of the Implied Duties since, if such an agreement would have resulted in section 91 being engaged, it would lend force to the argument that there was a breach of such duty. How, it might be asked, could it be right for an employer to provide a purported option which would be invalid under section 91?

Section 91, as amended by the Welfare Reform and Pensions Act 1999, provides, materially, as follows:

"Inalienability of occupational pension

(1) Subject to subsection (5), [where a person is entitled to a pension under an occupational pension scheme or has a right to a future pension under such a scheme] –

(a) the entitlement or right cannot be assigned, commuted or surrendered,

(b) the entitlement or right cannot be charged or a lien exercised in respect of it, and

(c) no set-off can be exercised in respect of it,

and an agreement to effect any of those things is unenforceable.

(2) Where by virtue of this section a person's entitlement [to a pension under an occupational pension scheme, or right to a future pension under such a scheme,] cannot, apart from subsection (5), be assigned, no order can be made by any court the effect of which would be that he would be restrained from receiving that pension …

(5) In the case of a person ('the person in question') who is entitled to a pension under an occupational pension scheme, or has a right to a future pension under such a scheme, subsection (1) does not apply to any of the following, or any agreement to effect any of the following –

…

(b) a surrender, at the option of the person in question, for the purpose of –

(i) providing benefits for that person's widow, widower, surviving civil partner or dependant, or

(ii) acquiring for the person in question entitlement to further benefits under the scheme …"

The wording which I have placed in square brackets in subsection (1) replaces the original wording which was "where a person is entitled, or has an accrued right to a pension under an occupational pension scheme". For that purpose, the meaning of "accrued rights" was to be found in section 124(2) Pensions Act 1995. Those rights at any time were "the rights which have accrued to or in respect of him at that time to future benefits under the scheme"; and where the member was still in pensionable service, his accrued rights were to be determined "as if he had opted, immediately before that time, to terminate that service".

Mr Stafford relies on what Mance LJ had to say about section 91 in its original form in Fisher v Harrison [2003] PLR 293 at [26]. In that case, Mr Harrison had effectively assigned his rights under a pension scheme as the result of a consent order made in satisfaction of a claim against him. It was held that on the true construction of the rules of the scheme, the consent order effected a forfeiture of Mr Harrison's future payments under the scheme, but not of any pension instalments or other rights which had fallen due for payment. On that basis Mr Harrison was entitled to dispose of or deal with the pension rights to which he was absolutely entitled, consisting of a lump sum which should have been paid in 1996 and the instalments of pension which should have been paid between then and the making of the consent order. Nothing in the consent order or in the agreement underlying it led to the forfeiture of those absolute rights. The passage on which Mr Stafford relies draws the distinction between absolute rights already due for payment (such as lump sums and pension instalments which have fallen due) and rights to future payment. He says that it supports his submission that the purpose of the amendment to section 91 was to go beyond what may be termed accrued rights and to encompass all future rights as well within the statutory protection. For my part, I derive no assistance at all from what Mance LJ said in this passage as a pointer to the purpose and ambit of the amendments to section 91.

Mr Stafford also contrasts the wording of section 91 with that of section 67 Pensions Act 1995 affording protection to "subsisting rights". Section 67 refers to "any right which at that time has accrued to or in respect of him to future benefit under the scheme rules". The ambit of section 91 must therefore be wider since it is, no longer at least, restricted to "accrued rights".

Applying those submissions to the present case, Mr Stafford says that section 91 would have been triggered if Mr Bradbury had accepted the BBC's offer. Mr Bradbury had a future right to have his pension calculated on the basis of the rules of the Scheme until validly amended. Unless and until amended, an agreement by Mr Bradbury to accept less than the rules provide would engage section 91. Mr Stafford submits that it is no answer to this to assert that the entitlement had not accrued prior to the pay offer being made: that would be to adopt for section 91 purposes the narrower protections afforded by section 67. If that had been intended, Parliament could simply have adopted the section 67 wording in section 91.

Mr Ham, however, explains the amendment and the need for it in a different way. The effect of section 124(2) Pensions Act 1995 was that accrued rights for active members were calculated on a leaving service basis. That made perfectly good sense in the context of section 67 which was concerned with protecting the rights which a member had earned in respect of his past service. But it did not make sense in the context of section 91 because the member would be able to assign, without thereby engaging section 91, the element of his past service benefit referable to future increases in salary.

In addressing those submissions, it is important to appreciate the scope of the original provisions. They were engaged where there was a purported assignment etc of an "entitlement" or "an accrued right". "Entitlement" referred (and still refers) to a pension in payment; and "accrued right" encompassed the rights of a deferred pensioner and part of an active member's eventual benefits, that part being ascertained as if he had left service on the date of the purported assignment etc. The different explanations which Mr Stafford and Mr Ham give for the amendment could, therefore, be significant. On Mr Stafford's reading, "the right to a future pension" includes the whole of the pension to which an active member eventually becomes entitled. It is not permissible presently to assign that part of a pension which accrues in the future, any more that it is permissible presently to assign that part of the pension which has accrued in the past. On Mr Ham's more limited explanation for the amendment, "the right to future pension" includes that part of the pension based on service to the date of the purported assignment, including the element of that pension which is based on salary increases after that date. But it does not necessarily include any part of the pension which accrues after the date of the purported assignment etc.

In my judgment, section 91, in referring to "the right to future pension" is focusing on all benefits payable in the future which arise as a result of both past service and future service. An active member does not, of course, have an entitlement to an immediate pension at all. It cannot even be said that he has a present right to a pension based on a salary in excess of his current salary since he might leave service (eg to move to another job) before any pay increase has been awarded. What can be said is that the Scheme provides him with certain benefits depending on his own circumstances. An active member thus has a right to receive a pension in the future, the amount of which will depend on a number of factors including not only pay increases but the period of future service. In my judgment, in referring to "the right to a future pension", section 91 is focusing on the pension to which a member will become entitled in future depending on the events which actually occur.

I do not consider that the decision of the Court of Appeal in IMG (reported at [2011] PLR 11) casts any doubt on that conclusion. At first instance, Arnold J had reached the conclusion, described by Mr Ham in an understated way as inconvenient, that section 91 precluded compromises of disputed pension rights. Effectively, the Judge held that "entitlements" and "rights" included putative entitlements and rights and that to give up a claim to such beasts fell within the ambit of the section. This approach was rejected by the Court of Appeal. It worth setting out a fairly lengthy citation from the judgment of Mummery LJ at [27] to [31]:

"27. In my view, the language of section 91 is clear. What the section makes inalienable is the surrender of "entitlement" and "right". The section is directed to cases of the deliberate giving up of an actual existing entitlement or an actual existing right. The judge's focus was on the importance of the nature of a "surrender" rather than on what was being surrendered, whether or not it was a pension entitlement or right.

28. I reject the contention that it refers to alienating or giving up any right that you may have. It expressly refers to cases in which a person "is entitled" to a pension or "has a right" to a future pension. An established or accepted entitlement or right is clearly within the general language of subsection (1)(a). It implements the statutory objective that a pension entitlement or right, which enjoys favourable tax treatment, cannot be used as an assignable asset.

29. Section 91 does not expressly refer to cases in which a putative entitlement or right to a pension is claimed, but its existence is doubted or disputed so that it has to be established by a legal determination, unless and until the matter is settled by agreement. The self-evident purpose of a settlement agreement is to avoid the need for the trouble and expense of obtaining a determination in legal proceedings.

30. On the judge's view the prohibition against surrender or agreement to surrender applies not only to cases of members aspiring to trade in their pension entitlements and rights, but also to the settlement of claims to a putative entitlement or right. If that is right, it would follow that all disputes about entitlements or rights to such a pension would have to be resolved by legal proceedings and authoritative determination, if there was any risk that a compromise involved a surrender or agreement to surrender. In my judgment, it is most unlikely that any such consequence was intended by the legislation. I do not think that the ordinary meaning of the wording of section 91 requires that inconvenient result.

31. In my view, the judge's reliance on the absence from subsection (5) of an express exception to the general restraint on alienability of benefits by allowing for compromises is misplaced and no assistance can be obtained from it. There is simply no need for an express exception to be made to a general rule against the surrender of an entitlement or right, if the terms of that rule do not in fact catch a compromise of a claim to a putative entitlement or right."

It must be remembered, of course, that Mummery LJ said what he did in the context of drawing a distinction between established entitlements or rights on the one hand, and disputed or putative entitlements and rights on the other hand. He did not have in mind, and was not directing himself to, the question of what counted as "the right to a future pension". In referring, in [27] to "an actual existing right" he is not, I consider, to be taken as suggesting that a pension to which a member will become entitled if his pensionable service continues for a further period of time is not "the right to a future pension". Nor do I consider that he is to be taken as doing so in [28] where he rejected the contention that section 91 "refers to alienating or giving up any right that you may have". The use of the words "any" and "may" in that context underlines the distinction just mentioned. They cannot be taken as drawing any distinction between the right to a future pension insofar as it is based, on the one hand, on past service and insofar as it is based, on the other hand, on future service. Indeed, in that same paragraph, he refers to an established or accepted entitlement or right as being

"clearly within the general language of subsection (1)(a). It implements the statutory objective that pension entitlement or right, which enjoys favourable tax treatment, cannot be used as an assignable asset".

Those observations apply from a policy perspective as much to future accruals as they do to past accruals.

Moving on from that point, Mr Ham submits that the approach taken by the Court of Appeal to compromises is of direct relevance to the present case. He says that the BBC realises that Mr Bradbury does not accept its interpretation of the definition of Basic Salary as giving it power to determine that part of an increase in salary is not to be pensionable; but putting it at its very lowest, he says that it is an arguable point making Mr Bradbury's right to an increased pension doubtful or disputed so as to fall squarely within the decision in IMG. It is merely a right that a member may have. I accept that it is an arguable point although, ultimately I think it is a bad point for the reasons which I have given. Not only is it an arguable point, but there is nothing to suggest that the BBC was acting other than in the belief that it had adopted the correct interpretation of the definition of Basic Salary in formulating its pay offer. That is an important point which will be relevant to the issue whether there has been any breach of the Implied Duties.

Mr Bradbury did not accept the BBC's offer, but had he done so, I do not find it easy to see how there would have been any element of compromise of a disputed right. Many employees did accept the offer and they may have taken different views about what the BBC was entitled to do as a matter of law. Consider the position of a member acting with the benefit of expert legal advice; suppose that he was advised that the BBC was not entitled to take an element of basic salary out of the definition of Basic Salary, but that a binding agreement was possible in accordance with SWT. Suppose that this hypothetical member, in the light of that advice, had decided to accept the BBC's offer realising that, in practice, he would not otherwise receive a pay increase. Such an agreement does not, it seems to me, involve any compromise of disputed rights. The parties (the hypothetical member and the BBC) simply did not, in this scenario, engage in a negotiation about disputed interpretations of the meaning of Basic Salary.

However, the fact that there was no compromise of an identified disputed issue does not, I consider, exclude the approach adopted by the Court of Appeal in IMG. Although that case involved a compromise, the reason why section 91 did not apply was not because there was a compromise (although that was the context of the analysis of section 91): rather, it was because there was no entitlement and no right which was alienated. It was the nature of the rights which the scheme member possessed which took the case outside section 91.

In the present case I consider that, whether the matter is viewed from the perspective of the BBC or from the perspective of members who accepted the offer of a pay increase subject to the 1% cap on pensionable pay, there would have been no alienation of any entitlement or right within section 91.

From the BBC's perspective, the definition of Basic Salary entitled it to do what it did. There would be no alienation of any entitlement or right at all. Further, it could not have been said by a member that the BBC's view of the meaning of Basic Salary was clearly wrong (albeit that I consider it is, in fact, wrong). There would have been, at the very least, a serious doubt about whether the BBC was wrong in the view it took. If a member had disputed the BBC's position, that dispute could then have been compromised by the member accepting the BBC's offer of a pay increase subject to the 1% cap and such a compromise would not have engaged section 91.

From the perspective of a member who accepted the offer and remained in his current Section of the Scheme, either he thought that the BBC had power to do what it did or he must have accepted that it was at least arguable that the BBC could do what it sought to do. He might have considered (if he thought about it at all) that it was arguable the BBC was entitled to do what it did in the light of the definition of Basic Salary; or he might have realised that he might not entitled to any pay increase at all, and that by refusing the offer, he would end up with no salary increase and therefore no increase in Pensionable Salary either. In either case, his right to a future pension based on the full amount of an anticipated pay rise was no right at all; and by agreeing to a pay increase only part of which would be treated as pensionable, he did not alienate anything to which he was even prospectively entitled.

As Mr Ham puts it in relation to the second alternative, members have no right to a salary increase. Accepting a salary increase on terms that part only is pensionable does not, he submits, involve a surrender of anything; the member becomes entitled to a greater future pension, albeit one that is smaller that if the whole increase were pensionable. I agree.

There is one further point which Mr Ham raises in relation to section 91. Even if section 91 is engaged (contrary to both his submission and my view), he relies on section 91(5)(b)(i) to escape the consequences. The hypothesis here is that a member, such as Mr Bradbury before he elected to join CAB 2011, has "the right to a future pension" based on the entirety of his basic pay (including the whole of any increase in basic salary). An agreement between the BBC and a member that there should be a pay increase over and above 1% of current Pensionable Salary but subject to the 1% cap for pension purposes is therefore, on this hypothesis, to be seen as a surrender of the right to a future pension, that is to say, an amount of pension attributable to the pay increase in excess of 1% of Pensionable Salary. What, then, is the "purpose" (within the meaning of section 91(5)(b)) of that surrender? Clearly its main purpose is to ensure a pay rise in excess of 1% of current salary. But it might also be said that one of its purposes is to achieve a 1% increase in Pensionable Salary which would not otherwise be obtained.

In my judgment, it cannot be said that the overall arrangement is one in respect of which the "purpose" of the surrender is the acquiring of further benefits under the scheme. That may be one of the effects of the surrender – the member gets a benefit which he would not have got absent the surrender - but that was not the real purpose of the surrender, which is to achieve a larger than 1% pay increase. I therefore reject Mr Ham's submission on this point.

For Mr Bradbury, no question arises about the actual operation of section 91 since he rejected the offer. In terms of Issue 2, however, my answer is that the BBC's conduct in seeking to impose a 1% cap on increases to pensionable salary through the mechanism of Mr Bradbury's pay award was not contrary to section 91 of the Pensions Act 1995 in the sense that, had he accepted the offer, section 91 would not have been enjoyed.

Issue 3: Was the BBC's conduct in seeking to impose a 1% cap on increases to pensionable salary through the mechanism of Mr Bradbury's pay award a breach of the Implied Duties arising from Mr Bradbury's contract of employment?

Mr Stafford contends that on the material before the PO, the only permissible option available to him was to conclude that the BBC's actions in this case amounted to a breach of the Implied Duties. He says that it is not necessary to consider the developments in this field over the years since the facts and circumstances of the present case fall well within the principles set out in the seminal authority of Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 1 WLR 589 ("Imperial Tobacco"). He has set out in his skeleton argument a summary of the facts on which he relies and has included citation from Imperial Tobacco. He has addressed me further in his oral submissions on this aspect of the case. I intend no disrespect if I include only the briefest summary in this Judgment. As to the facts:

a. The BBC has determined that the 1% cap on increases to pensionable pay shall apply to members of the Scheme such as Mr Bradbury for all future pay rises.

b. The offer made is constructed in such a way to be, as the PO himself concluded, no effective offer at all in the sense that the employees have no real option but to accept it. This is because the penalty for not accepting the limitation is to receive no pay rise at all. This is the case even though the BBC will otherwise have determined that a pay award is due and owing to that employee.

c. The restriction on pensionable pay is restricted to members of the Old Benefits, New Benefits and CAB 2006 Sections of the Scheme such as Mr Bradbury. In the circumstances it effectively drives all such active members out of their current Section unless they are very close to retirement. This is because the limit on pensionable pay is not applied to the CAB 2011 Section or LifePlan. The coercion of members out of the current Section must be inferred, Mr Stafford submits, as being an intended consequence of the arrangements.

d. The loss of the pay award applied in its entirety if the pension cap was not accepted. This would be the case regardless of the way in which the employee had performed throughout the year and/or any rises in the cost of living and/or any additional duties undertaken. Mr Stafford submits that to remove the pay award in its entirety undermines to a fundamental extent the underlying reasons for a pay award being made in the first place.

Mr Stafford submits that these factors both individually and cumulatively amount to a breach of the implied terms of good faith and/or trust and confidence. He relies on the general statements of principle set out by Browne-Wilkinson V-C at pp 533A to 534C of Imperial Tobacco. I do not consider it necessary to set out those by now well-known principles. It is important to note, however, that the Implied Duties are not fiduciary duties. Nor are they duties whose scope is to be assessed by reference to concepts of reasonableness, for what seems reasonable to an employer may seem unreasonable to an employee and vice versa. Instead, an employer must not exercise its powers under a pension scheme so as seriously to damage the relationship of confidence between the employer and the employees and ex-employees; in other words there is a duty not to undermine the relationship of trust and confidence which exists between an employer and the members of a pension scheme similar to the duties arising in employment law between an employer and his employees. Indeed, the whole concept of the Implied Duties was borrowed from the concepts of employment law.

The principles, although easy to state, are sometimes very difficult to apply in practice to the facts of a particular case. And although the Vice-Chancellor went on to give some practical guidance about how the principles would work out on the ground, I do not think I am alone in finding some of the examples he gave as hard to fit within the principles. It should not be overlooked that he gave this guidance in order to assist the committee of management in the difficult, and urgent, task they faced. He did so under protest:

"Given the urgency of the matter, I was therefore forced, much against my inclination, to give such indication as I could on hypothetical and unproved facts as to the effect of the obligation of good faith on the company's power to withhold consent."

The facts, so far as they are known, in Imperial Tobacco are relevant to the way in which the Vice-Chancellor both formulated the general principles and to the practical guidance which he gave. It is of particular relevance to note that under the rules of the relevant fund, which had been established in 1929, any surplus on the determination of the fund was to be applied solely for the employees, the pensioners and their dependants, and in no circumstances did any part of the surplus revert to the company. There was no express provision for increasing pensions but the committee of management had done so regularly by exercising the power conferred on it by the scheme to amend the rules with the consent of the company. Shortly before a takeover of the company, the committee of management and the company altered the rules so as to provide for the automatic closure of the fund in the event of a takeover and to introduce a new rule which guaranteed pension increases of "at least" the lesser of 5 per cent, and the increase in the rate of inflation. When the rate of inflation increased to above 5 per cent the committee sought, but failed to obtain, an assurance from the new management of the company that it would consent to inflation linked increases in benefits greater than 5 per cent. The company opened a new pension fund, R.B.S., for new employees under which any ultimate surplus would revert to the company. The company offered an inflation linked increase of up to 15 per cent. to any member of the fund who transferred to R.B.S. taking his aliquot share of the fund with him.

Against that background, the Vice-Chancellor formulated his general principles and included amongst his guidance the following:

"First, in my judgment the relevant question is not whether the company is acting reasonably. …... It must be open to the company to look after its own interests, financially and otherwise, in the future operations of the scheme in deciding whether or not to give its consent. However, in my judgment the obligation of good faith does require that the company should exercise its rights (a) with a view to the efficient running of the scheme established by the fund and (b) not for the collateral purpose of forcing the members to give up their accrued rights in the existing fund subject to this scheme.

As to (a), in my judgment it would be a breach of the obligation of good faith if the company were to say that it would never consider whether or not to consent to an amendment increasing benefits. In my judgment the obligation of good faith resting on the company as employer requires that it should consider each proposal for amendment under clause 36 put forward by the committee at the time it is put forward in the light of the circumstances that then exist. A blanket refusal by an employer to consider amendments of a kind which are beneficial to the employees and which have for the last 20 years been acceptable to the employer is plainly calculated to undermine the trust of the employees in their employer. Good faith requires the company to consider the proposals each time they are made. If, which the company does not accept, the company has purported to give such a blanket refusal, such refusal was improper and the company is bound to consider each proposal for amendment as it is put forward.

As to (b) above, the starting point must be that there is in existence a trust to provide pension benefits for a closed class of employees. In my judgment, the obligation of good faith requires that the company should not exercise its rights for the purpose of coercing that class to give up its rights under the existing trust. The duty of good faith requires the company to preserve its employees' rights and pensions fund, not to destroy them. If there are financial and other considerations which require the fund to be determined, so be it. But if the sole purpose of refusing to consent to an amendment increasing benefits is the collateral purpose of putting pressure on members to abandon their existing rights, including the right to the surplus on determination, in my judgment the company would not be acting in good faith.

Mr. Mowbray pressed me with the consideration that at least one of the legitimate reasons for the company refusing its consent to increase benefits would be its own financial interests, e.g. future increases in the payments to be made to the scheme by the company. As I understand the argument, it was that since the company's own financial interests was a legitimate consideration there could be no limit on its right to withhold consent even, say, for the purpose of promoting the transfer of the surplus of the fund to the R.B.S. so as to make it available to the company as the ultimate beneficiary of the R.B.S. assets. I do not accept that step. Obviously, the company can have regard to its own financial interests but only to the extent that, in so doing, it does not breach the obligation of good faith to its employees. If the sole purpose of withholding consent to increase benefits out of the fund is to force its present and past employees to give up their accrued rights in an existing fund so as to confer on the company benefits that it cannot enjoy unless the members give up such rights, in my judgment this conflicts with the company's duty to act fairly and in good faith to its employees. The company could not, without breaching the obligation of good faith, seek to coerce an employee into giving up, say, a car which was his own property; no more can the employer seek to coerce the employee to give up another species of property, i.e. his rights in the pension fund".

Mr Stafford says that there are striking parallels with the present case. He says that there is plainly a collateral purpose here which is to drive individuals out of their current Section of the Scheme. The BBC is seeking to operate a blanket refusal for the future as to what level of pay will be pensionable. Further, the offer is constructed in reality as being no offer at all: as the PO said, Mr Bradbury did not have a real alternative to accepting the salary increase on the terms offered. As to that last matter, I observe only that Mr Bradbury did not, in the event, accept the offer, but elected, possibly under protest, to transfer to CAB 2011.

Mr Stafford adds to his list of breaches of the Implied Duties the fact, according to him, that the BBC is ignoring a number of factors which are widely recognised as being relevant considerations when assessing whether or not to award a pay rise, namely to reward hard work; loyalty; additional duties and rises in the cost of living. If the employee refuses to accept the limitation on their pensionable pay they will receive no pay rise at all regardless of how well they have performed or how far the cost of living may have increased. Indeed they would still have the cap imposed even if they were promoted and undertook additional duties and responsibilities. This represents, he says, extraordinary conduct by an employer.

As to all of this, Mr Ham says that I should not embark upon any sort of resolution of the allegations of breach of the Implied Duties. He contends that the complaint to the PO did not allege that in seeking to impose the 1% cap the BBC was acting in breach of the Implied Duties. The PO did not, accordingly, deal with the issue in the Determination. He submits that this is a fact-sensitive issue and that I should not allow it to be raised for that reason alone. It is not good enough to assert (as Mr Stafford does) that the relevant background facts are not in dispute. He says – and it is impossible not to agree – that if breach of the Implied Duties had been properly dealt with by the PO, there would have been a much more detailed investigation of the genesis of and rationale for the BBC's proposals. By way of example, he refers to the decision of Newey J in The Prudential Staff Pension Scheme, Prudential Staff Pensions Ltd v Prudential Assurance Co Ltd & others [2011] EWHC 960 (Ch) ("Prudential") where there was a three week trial with extensive oral evidence. Mr Ham contends that this is the sort of case which is wholly unsuitable for investigation by the PO at all, let alone for consideration for the first time on appeal.

I think that Mr Ham is pitching this submission rather high. I have set out at some length in paragraphs 13ff the terms of the original complaint and the correspondence which followed. As can be seen from paragraph 17 above, Mr Bradbury described the process which the BBC had undertaken as "a travesty or trust and decency. The honest, rightful and proper path for such a substantive change to a Scheme definition is for the BBC to go to the Trustees to seek a variation to the pension fund deed". That might be seen as a layman's way of raising precisely the complaint of breach of the Implied Duties. But whether or not that is so, the subsequent correspondence with Mr Lam failed to address such breaches at all, and it is clear that neither he nor the PO gave consideration to a complaint of that sort; and the BBC itself was not invited to respond to such a complaint. It is true that the BBC did, in its own submissions, give a summary of how it justified the approach which it had taken but it would not be fair, at this stage, to restrict the BBC to that short summary in seeking to resist any allegation of breach of the Implied Duties.

I therefore agree with the preliminary objection. 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; and clearly this appeal is not the appropriate time to allow further evidence, not least because the appeal is on a point of law only. Even in cases of summary judgment, a defendant is at least allowed the opportunity to present factual material to the court. The BBC has not even had that opportunity.

Mr Ham submits, in any case, that Imperial Tobacco does not apply to the present case because the BBC has not exercised any power or right under the Scheme. I should not be taken as agreeing with that, although an actual decision on the point is for another time and place. Against Mr Ham's submission, it can be observed that if the BBC's construction of Basic Salary is correct, it is precisely its power to determine what remuneration falls within that definition which enables it to dictate that only part of a proposed pay increase should be pensionable. It is the introduction and exercise of that discretion which is subject to the Implied Duties. And even if the BBC's construction is wrong, it is still well arguable that the Implied Duties apply just as much in the context of the offer of a pay increase coupled, as it was, to the 1% cap for pension purposes. Mr Ham says that Mr Bradbury's only possible complaint is against the BBC as his employer for failing to offer him a salary increase, a complaint which does not fall within the jurisdiction of the PO. I doubt the correctness of that too. Mr Bradbury was, after all, offered a pay increase subject to a condition about its pensionability. It is the condition about which he complains and that, it may well be, is a complaint against the BBC in relation to the Scheme which falls within the PO's jurisdiction.

Nonetheless, the facts of the present case are far away from those of Imperial Tobacco. In that case, it was a very important consideration that the employer was (a) seeking to force members to give up their accrued rights by moving to another scheme and (b) to take for itself the benefit of a surplus which under the rules of the existing scheme would be applied for the benefit of the members and former members of the scheme. The Vice-Chancellor recognised that the employer was entitled to take into account its own financial interests. That appears from the first and last of the four paragraphs of his judgment which I have cited at paragraph 93 above. In rejecting Mr Mowbray's argument, the Vice-Chancellor was clearly influenced to a large extent by the possibility that the sole purpose of the employer withholding consent to increase benefits out of the fund might well have been to force its present and past employees to give up their accrued rights in an existing fund so as to confer on the employer benefits that it could not enjoy unless the members give up such rights. It was that which, in his judgment, conflicted with the employer's duty to act fairly and in good faith to its employees. He himself also recognised that the might be financial or other considerations which required a scheme to be determined in which case, as he said, "so be it".

In the present case, there is no suggestion that the BBC was attempting to obtain assets from the Scheme for its own benefit. Its case would be, if the evidence were before the Court, that pension costs were unsustainable at the level being incurred and that something had to be done to reduce those costs. Evidence of the involvement of the Trustee and of members' representatives would throw light on the appropriateness of the BBC's actions. Nor do I find it clear that what the BBC did amounted to improper coercion of Mr Bradbury and other members of the Scheme. Rather, the BBC came up with the options which it offered members in order to put the Scheme on an affordable or sustainable basis for the future. If financial and other considerations can lead to the termination of a scheme, such considerations must surely be capable of leading to changes to benefits with a view to putting the scheme on a sustainable basis for the future.

I do not say that Mr Bradbury does not have some good arguments for saying that what the BBC actually did cannot be justified. What I do say is that the BBC does have contrary arguments and may be able to justify what it did by reference to those, among other, considerations. The necessary facts have not, however, been found by the PO because the matter was not dealt with by him on that basis. It is not, therefore, possible for this issue to be dealt with in the context of the appeal before me.

I should mention again, the decision of Newey J in Prudential where he reviewed the authorities relating to duties of good faith since Imperial Tobacco, both in the pensions and the employment context. In the light of my conclusion that I should not embark upon a detailed examination of Mr Bradbury's case on breach of the Implied Duties, I do not need to go into any detail either in relation to Newey J's exegesis in Prudential. I mention it because it demonstrates, in my view, that Mr Stafford cannot be right when he submits (see paragraph 89 above) that for present purposes it is not necessary to go beyond Imperial Tobacco itself. The decision in Prudential shows that the scope for challenge of an employer's decision is not as wide as one reading of Imperial Tobacco might suggest. It reiterates that the employer is not subject to fiduciary obligations and may take its own interests into account. There is not, either, a duty reflecting Wednesbury principles to take the correct considerations into account. However, a decision by an employer in a pensions context which was irrational or perverse might offend the obligation of good faith, and in that context, Members' interests and expectations might be of relevance when considering whether an employer had acted irrationally or perversely. The circumstances in which a decision could be said to be irrational or perverse are severely limited in the light of those considerations.

Accordingly, Mr Ham would submit that the action taken by the BBC was not in breach of any Implied Duties. The BBC has adopted a middle way in order to keep the Scheme open and continue to provide defined benefits, albeit that they may be less generous than the benefits previously offered. It is, he accepts, regrettable that it has felt it had to do so, but it was not irrational or perverse. Many employers have simply closed their schemes to any future accrual on a defined benefit basis. Mr Bradbury has no right to a salary increase and in view of the financial position of the Scheme it was not irrational or perverse to offer him one only on terms. Those would be his submissions if he had to make them. I cannot say on the material before me that he would be bound to succeed; but it would be entirely unsurprising to find that the evidence gave considerable support to such submissions. He does not, in this appeal, have the evidential base for his submissions; but the reason for that is not because of any fault on the part of the BBC. The reason is that the issue was not a live issue before the PO.

My answer to Issue 3, therefore, is that it is not open on this appeal for Mr Bradbury to take the point.

Issue 4: Was the BBC's cumulative conduct in seeking to impose a 1% cap on increases to pensionable salary through the mechanism of Mr Bradbury's pay award such as to amount to maladministration for the purposes of the Pension Schemes Act 1993?

It follows from my conclusions in relation to Issues 1 to 3 that Issue 4 does not raise any discrete point. Indeed, if Mr Bradbury is unsuccessful on Issue 3 (taking account of the impact of his points in relation to Issues 1 and 2) it is not easy to see how he could succeed on Issue 4. Conversely, if he succeeds on Issue 3, it is a logical consequence that he should succeed on Issue 4.

The way forward

It does not follow from my conclusions that Mr Bradbury is now altogether precluded from raising the question of breach of the Implied Duties by reason of some sort of res judicata or otherwise. There are, however, different ways in which he could take forward his complaint procedurally. Mr Stafford submits that I should remit the matter to the PO. Mr Ham submits that that Mr Bradbury's appeal should be dismissed and that the issue should be the subject either of a new complaint to the PO or possibly of court proceedings. I do not propose to determine the way forward at present. The parties may be able to reach an agreed position which can be presented for my approval. If agreement cannot be reached, I will hear further argument.

Disposition

I will deal with the formal disposition of this appeal in the light of any agreement which the parties might reach about the way forward or, if agreement cannot be reached, after hearing further argument.

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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Bradbury v British Broadcasting Corporation [2012] EWHC 1369 (Ch) (23 May 2012) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2012/1369.html Cite as: [2012] EWHC 1369 (Ch)