The chairman of trustees at British Airways' Airways Pension Scheme's (APS) this week told thousands of disgruntled members that their pension payment increases are to be switched to the lower consumer price index of inflation (CPI) in order to preserve the long-term health of the fund.

According to a BBC report, Paul Spencer continually argued to the estimated 2,000 APS members who attended a members meeting at Ascot racecourse this Monday that a weak employer covenant with sponsors British Airways (BA) left the scheme in a worse funding position than many presume. He reportedly told the meeting that "BA is not the strongest of companies to rely on for contributions,
now or in the future. We are a long way from securing your pensions."

This argument was dismissed by former APS trustee Mike Post, who is one of three trustees to have resigned from the scheme's board this year in protest at the more modest increases in pension payments. Post told Pension Funds Insider that "my experience as a trustee was that APS is incredibly conservatively invested."

Post referred to APS's large holdings of low-risk index-linked gilts, which at the end of the 2009-10 financial year amounted to around 80% of the fund's £5.95bn in assets, according to Pension Funds Online data. He also said that "20% of the pension liabilities are insured in an insurance buy-in that was completed in June 2010 based on an assumption of liabilities increasing in line with RPI".

Nonetheless their latest pension accounts show that British Airways is carrying a pension deficit of close to £3bn despite saving some £770m with the switch to CPI-linked pension increases in April of this year.

The Ascot members' meeting unanimously carried a resolution demanding that trustees retain a funding target that accounts for RPI pension increases and backdate RPI payments to April 2011, when members found their pension increases had automatically been changed to the CPI index. A postal ballot of all members on the resolution is to be sent out within the next 35 days and will be organised by the three former trustees.

Legal matters

As APS are determined not to offer any immediate reversal of the change to CPI but member opinion is fiercely opposed to the less generous increases, it looks increasingly likely that the dispute will be settled legally.

Echoing predictions of a 'small print lottery' when the government gave private sector schemes the go-ahead to implement a shift to CPI last year in order to match the way public sector pension increases are now calculated, representatives of members and the fund are analysing previous communications from the scheme and members for references to RPI.

Mike Post complains that letters sent to widows of APS pensioners explicitly have in the past guaranteed an RPI-link to inherited pensions, while a brochure asking APS members if they wanted to join British Airway's separate New Airways Pension Scheme in 1984 apparently referred on its front page to the APS as offering "fully inflation-proofed index-linking pensions".

A lawyer representing APS has dismissed the claims that these communications amount to a guarantee of RPI-linked pension increases. Anthony Arter, a partner of Eversheds LLP reportedly told members at the Ascot meeting that "you have no legal entitlement to increases outside those stated in the rules" as despite the occasional references to inflation-linkage in the past he has been "unable to fund any intention to form a contractual relationship outside the rules, greater than what they [the members] were entitled to."

Pension Funds Insider has seen emails which appear to confirm that the trustee board gave its approval earlier this year to seek judicial advice before a move to CPI was introduced. This has not yet occurred and campaigning members, led by the three former trustees are now said to be considering their own legal action against the scheme.

Post says: "Trustees have not carried out a full valuation of whether CPI is an appropriate index even though they are required to do that under the rules of the scheme. It was their duty to asses this appropriateness before they started paying CPI-linked increases in April."

Post said that the members' campaign will continue "until we win".

For his part, the chairman of trustees at APS has promised to reintroduce RPI-linkages at some point in the future when the scheme's funding level allows. Spencer told scheme members at the Ascot meeting that "it is a very important aim to restore RPI increases as soon as prudent to do so."

Campaigning members are unwilling to believe that the trustees wish to eventually revert back to RPI. A source close to the APS trustees told Pension Funds Insider that a sub-committee has already been launched by the scheme's leadership to look at how they can eventually change back to the more generous inflation index.

First published: 21.04.2011

dbillingham@wilmington.co.uk