England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(Warren J)
CH/2011/0648

		A3/2015/3326 Royal Courts of Justice Strand, London, WC2A 2LL
		28/07/2017

Lady Justice Gloster :

Introduction

1. This is an appeal by Mr John Bradbury ("the appellant" or "Mr Bradbury") against two orders of Warren J ("the judge"), dated 2 July 2012 and 6 October 2015, which dismissed appeals by the appellant against two determinations of the Pensions Ombudsman ("the PO") dated 24 October 2011 and 23 December 2013 respectively. By those determinations, the PO dismissed the appellant's complaint arising out of the conduct of the British Broadcasting Corporation ("the respondent" or "the BBC") in relation to the appellant's pension.
2. This appeal concerns the decision by the BBC to cap at 1% the part of a pay rise that would be used to calculate pensionable pay ("the Cap") in the final salary sections of the BBC Pension Scheme ("the Scheme") in circumstances where the BBC was faced with a multi-billion pound deficit in the Scheme.
3. The judge's reasons for upholding the PO's determinations are set out in two judgments: [2012] EWHC 1369 (Ch) ("the first judgment") and [2015] EWHC 1368 (Ch) ("the second judgment").
4. Mr Andrew Stafford QC and Mr Nicholas Randall QC appeared on behalf of Mr Bradbury. Mr Michael Furness QC, Mr David Craig QC and Miss Emily McKechnie appeared on behalf of the BBC.

Factual Background

5. Mr. Bradbury is a member of the BBC Philharmonic Orchestra, and has been employed by the BBC since 3 January 1997.
6. Mr Bradbury is a member of the Scheme. BBC Pension Trust Ltd ("the trustee") is the trustee of the Scheme. The respondent covenanted with the trustee to observe and perform the provisions of the trust deed and rules of the scheme.
7. Until 2011, the Scheme had three Sections with different benefit structures, known as the "Old Benefits Section", the "New Benefits Section" and "CAB 2006". The Old Benefits Section and the New Benefits Section provide a pension calculated as a proportion of the member's pensionable salary earned in the last year of active membership. CAB 2006 is a career average scheme, meaning that the member's pension is calculated as a percentage of the member's pensionable salary earned in each year of active membership. Mr Bradbury was a member of the New Benefits Section until 2011.
8. The BBC concluded that the deficit and future burdens of the Scheme were and would remain unsustainable. Accordingly, in 2010 it established a new career average Section of the Scheme called "CAB 2011" and a new defined contribution Scheme called "LifePlan", both of which would yield lower benefits to members.
9. In December 2011, the appellant elected to join CAB 2011, for his future service, in the circumstances set out below. However, the conduct of the respondent of which the appellant complained took place whilst the appellant was still a member of the New Benefits Section.

The terms of the New Benefits Section

10. The rules of the Scheme are set out in the 45th Deed of Variation dated 30 March 2011 ("the 2011 Rules"). Whilst it is necessary to refer to previous versions of the Scheme rules in relation to specific points, unless otherwise stated, I address the 2011 Rules.
11. In the New Benefits Section, the appellant's pension was based on final salary. Specifically, under rule 6A.1 the appellant would receive:

"[A] pension for life at an initial amount of 1/60th of the Member's Final Pensionable Salary for each Year (not exceeding 40) of his or her Pensionable Service."

The calculation of the pension by reference only to final salary in the New Benefits Section contrasts with the position in CAB 2006 and CAB 2011, where the pension calculation took into account earnings in each year of employment.

12. Rule 1.3 defined the relevant terms:

'Final Pensionable Salary' was defined as:

"[A New Benefits Section] Member's Pensionable Salary in respect of the last Year (calculated at a daily rate) of his or her Pensionable Service (which in this definition includes as an Active member after Normal Pension Age).^[1]

Provided that

(a) if a Member's Pensionable Salary is reduced during the last 10 Years of Pensionable Service, Final Pensionable Salary will be determined by the BBC. It will not be less than the Member's Pensionable Salary paid in the last Year of Pensionable Service, nor more than the greater of -

(i) the annual equivalent of his or her highest Pensionable Salary during the last 10 Years of Pensionable Service; and

(ii) the highest average annual equivalent of Pensionable Salary paid in any 3 consecutive Years ending in the last 10 Years of Pensionable Service;

(b) if a Member's Pensionable Service includes Part-Time Employment, (a) above will not apply and this definition is modified as set out in rule 9.3; and

(c) in calculating the Final Pensionable Salary of a Class A Member (as defined in Schedule 3), his or her Pensionable Salary in respect of each day during a Year must not exceed the Scheme Earnings Cap on that day."

'Pensionable Salary' was defined as:

"[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."

'Basic Salary' was defined, so far as the New Benefits Section was concerned, as:

"[T]he 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 Pensions (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."

In order to distinguish between the total sums actually paid to an employee under their employment contract and the defined concept of "Basic Salary", I will refer to the former as simply "pay".

13. There was a dispute between the parties in relation to the effect of the words "determined by the BBC" in the definition of Basic Salary. The respondent contended that the effect of these words was that it could decide whether an increase in pay (or how much of the increase) counted as Basic Salary; since Final Pensionable Salary was calculated by reference to Basic Salary, this would allow the respondent to determine whether a pay rise would count towards the calculation of an employee's pension – that is to say, whether it was "Pensionable Salary". The appellant did not accept this construction, and argued that these words merely reflected the fact that the respondent could, of course, decide what level of pay to offer to employees; the respondent could therefore determine what pay to offer, but it could not determine that pay would not count as Basic Salary.
14. To the extent that a determination of Basic Salary by the respondent would involve the exercise of a discretion or power, it is relevant to recite the terms of rules 13.3(1)-(2), read alongside rule 13.3(3), which provided that:

"(1) Every discretion or power conferred by the Rules on the [BBC] will be absolute and uncontrolled, except that it must, if necessary, be exercised in such a manner as, in the [BBC's] opinion, is necessary for the retention of the Scheme's status as a Registered Scheme.

(2) The [BBC] may vary or revoke any regulation or decision by [it] under the Rules, unless -

(a) doing so would infringe (1) above; or

(b) the original regulation or decision was expressed to be irrevocable; or

(c) the consent of another party was required to the original regulation or decision and the other party does not consent to it being varied or revoked."

15. Finally, clause 5 of the 2011 Rules provided that the rules "may be altered under Rule 19.2". Rule 19.2 in turn provided:

"The Trustees may from time to time, with the consent of the BBC, by deed executed by the Trustees and the BBC, alter or modify any of the trusts, powers or provisions of the Trust Deed or the Rules.

Provided that no such alteration or modification shall - ……

(3) take effect as regards the Active Members 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 interest of such Members; or

(b) the Actuary certifies that to the extent to which the interests of such Members are so prejudiced, substantially equivalent benefits are provided or paid for by the BBC or the Trustees or provided under any legislation; or

(c) the alteration or modification is approved by resolution adopted at a meeting of such Members convened by the Trustees".

The conduct of the respondent complained of by the appellant

16. By 2008-2009 the respondent was facing a growing need to reduce its pension liabilities. The respondent considered various options, sought external advice and engaged in consultations with the trustee, Scheme members and employee unions.
17. Ultimately these discussions culminated in an email on 13 December 2010 addressed to all employees, confirming that existing members of the Old Benefits Section, the New Benefits Section and CAB 2006 would have three options:

i) to remain in their current Section, but with only 1% of any future pay increases to count as Basic Salary from April 2011 ("the Cap");

ii) to join CAB 2011, which had been newly created; or

iii) to join 'LifePlan', which was a newly created defined contribution pensions plan.

18. On 11 January 2011 the appellant submitted a complaint to the PO. The complaint made a range of criticisms about the respondent's conduct, but, by the time of the present appeal, these criticisms had been distilled into two key points. First, the appellant contended that the Cap breached the appellant's right to a future pension linked to his final pay. That is to say, without the Cap, the totality of any pay rises would count as Basic Salary and thus towards the appellant's pension. By contrast, with the Cap, only a proportion of any pay rises would be pensionable. The appellant's pension would therefore be less with the Cap than it would be if there was no Cap, albeit that the pension would be higher with pay rises subject to the Cap than it would be if there were no pay rises at all. For convenience, I will headline this argument as "the Cap breaking the link between pay and pension". It was said that breaking the link between pay and pension was contrary to section 91 ("section 91") of the Pensions Act 1995 ("the 1995 Act"), which I set out below.
19. The second strand of complaint related to the process by which the respondent had arrived at the three options set out above and by which it sought to implement changes to the operation of the Scheme. Rather than exercise the power to amend the Scheme Rules under rule 19.2, the respondent sought to agree the Cap with employees individually. The appellant contended that this marginalised the trustee and the trade unions.
20. In October 2011, the position reached a crossroads for the appellant, when the respondent wrote to him to offer a pay rise subject to the Cap. In effect, the appellant had a choice as to whether to:

i) remain in the New Benefits Section and accept a 2% pay rise subject to the Cap, such that only 1% of the pay rise counted as Basic Salary;

ii) remain in the New Benefits Section but receive no pay rise at all; or

iii) accept the 2% pay rise but move to CAB 2011 or LifePlan.

21. Initially the appellant chose to remain in the New Benefits Section but receive no pay rise. However, on 20 December 2011 the appellant elected to accept the 2% pay rise and join CAB 2011, whilst reserving his right to claim damages if his complaint about the respondent's conduct was upheld.
22. It is also relevant to note that, whilst this appeal is not a test case in any formal sense, other complaints to the PO about the same conduct by the respondent have been stayed pending the outcome of this appeal. Some of those complaints involve employees in a slightly different position from that of the appellant. For example, on 31 August 2011 a Ms Ramcharan accepted a pay rise subject to the Cap and remained in her existing Scheme Section, whilst reserving her right to complain that the Cap is unlawful.

Section 91 of the 1995 Act

23. In order to summarise the decisions below and the parties' submissions on the appeal, it is convenient first to set out sections 91(1) and 91(5)(b) of the 1995 Act. This provides as follows:

"(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.

……

(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 decisions below

24. On 24 October 2011 the PO made his first determination, rejecting the appellant's complaint. Reading the first determination alongside a previous letter sent by a PO investigator on 22 September 2011, with which the PO agreed, the PO's reasons were in summary:

i) The respondent could determine how much of a pay rise counted as Basic Salary, if an employee agreed to it. This was despite the PO noting that "in effect [employees] do not have a real alternative to accepting the salary increase on the terms offered".

ii) The Cap did not affect any existing or accrued rights of the appellant. No change was being made to the Scheme, so the appellant's accrued rights were not affected.

iii) There was nothing to prevent the respondent from achieving an outcome which would not be permissible by a change of Scheme rules by means of agreements with individual employees.

iv) Certain complaints concerning the appellant's employment contract were outside the PO's jurisdiction.

25. The appellant's appeal from the PO's first determination resulted in the first judgment, handed down on 23 May 2012, in which the judge held that:

i) The definition of Basic Salary did not permit the respondent to determine whether a pay rise counted as Basic Salary.

ii) However, the appellant's agreement to a pay rise subject to the Cap would be binding and effective unless it would be contrary to either section 91 or the implied duty of trust and confidence.

iii) The Cap was not contrary to section 91(1) because there was no surrender of any rights which were protected by that provision.

iv) The appellant had not squarely raised the argument before the PO that the respondent's conduct breached its duty of trust and confidence, with the result that the PO had not made factual findings on this issue. Accordingly, on 2 July 2012 the judge ordered that the complaint be remitted back to the PO for determination of that issue.

26. On 23 December 2013, the PO made its second determination, which dealt with the question of whether the respondent had breached the duty of trust and confidence. I interpose that this point was considered on the basis of the judge's finding that the Cap did not breach section 91. The PO concluded that there had been no breach of the duty of trust and confidence and thus rejected the complaint. The PO's reasons were in summary:

i) It could not be said that the respondent had acted irrationally or perversely in proposing the Cap.

ii) The respondent had acted in order to address the Scheme deficit. The sole or principal purpose was not to achieve a more agile workforce, in the sense of encouraging long-serving staff to leave. However, it was not necessary to make any findings in relation to the appellant's evidence that this had been the respondent's purpose.

iii) It was not necessary to consider the appellant's argument that the Cap discriminated against younger Scheme members, since the appellant accepted that he was not part of this class.

iv) The consultations with the Scheme members, the trustee and the unions were not flawed.

v) The appellant was not subjected to improper coercion.

vi) Overall, the respondent's conduct was not calculated or likely to seriously damage the relationship of trust and confidence.

27. The appellant again appealed, which resulted in the second judgment of 15 May 2015, in which the judge dismissed the appeal. He held that:

i) The suggestion in the first PO determination that the appellant "did not have any real alternative" was not supposed to indicate any sort of coercion of the appellant.

ii) It did not matter much whether the question was framed as: (a) whether the respondent had acted irrationally or perversely; or (b) whether the respondent's conduct was calculated or likely to seriously damage the relationship of trust and confidence.

iii) It was too late to argue that the respondent's conduct defeated the appellant's reasonable expectations, and, in any event, it did not do so.

iv) There was no basis on which to challenge the individual or overall conclusions reached by the second PO determination.

The issues on the appeal

28. The appellant and the respondent differed in their formulation of the issues which arose on the appeal and the order in which they should be taken. In my view, there are four principal issues which arise for determination:

i) Did the definition of Basic Salary permit the respondent to determine whether (or how much of) a pay rise counted as Basic Salary, or would it be a breach of the Scheme rules to impose the Cap?

ii) Did the Cap breach section 91 of the 1995 Act?

iii) Was the Cap binding and effective by application of the principle articulated in South West Trains v Wightman [1998] Pens LR 113 ("SWT")?

iv) Taking into account the above, and any other relevant matters, did the respondent breach its implied duty of trust and confidence?

29. Issues (i)-(iii) are in one sense academic as regards the appellant because, unlike Ms Ramcharan, he did not accept the Cap. However, it is said by the appellant that issues (i)-(iii) inform the question as to whether there was a breach of the duty of trust and confidence by the respondent in proposing the Cap.
30. In addition, if the respondent is right about issue (i), that is also strictly determinative of issues (ii)-(iii). If the respondent was entitled to determine whether any future pay increases counted as Basic Salary, it could not be said that the Cap infringed any right protected by section 91, since the appellant would never be entitled to more than the respondent's determination, and it was not necessary to give effect to the Cap as a SWT agreement. However, issues (ii)-(iii) raise points of general importance on which it is appropriate to express a view. Further, issue (iv) would require consideration in any event, because there is the argument that the respondent was in breach of the duty of trust and confidence in relation to the process which it had adopted in proposing the Cap, even if it was entitled to do so.

The appellant's submissions before this court

31. The arguments developed on the appellant's behalf by Mr Stafford QC in written and oral submissions in relation to the above issues on the appeal may briefly be summarised as follows.

i) As to issue (i), Mr Stafford submitted that the definition of Basic Salary did not enable the respondent to determine that pay which ordinarily would be categorised as Basic Salary (including a pay rise) would not count as such. On the contrary, the Cap would constitute a breach of the Scheme rules.

ii) As to issue (ii), Mr Stafford submitted that the Cap infringed section 91. Section 91 was intended to protect not just the accrued value of the appellant's pension, but also what the pension might become worth in the future. That was clear from the plain words of the section.

iii) As to issue (iii), Mr Stafford submitted the Cap could not take effect as a SWT agreement. If the Cap was contrary to the Scheme rules and/or section 91, it was not possible to circumvent this by agreement between the appellant and respondent. Even if it were in principle possible to agree to the Cap, this had not happened since the appellant had not been presented with any real choice.

iv) As to issue (iv), Mr Stafford submitted that the respondent had breached the duty of trust and confidence, which he submitted was located within an overall employment 'relationship' between the appellant and the respondent.

32. Mr Stafford accepted that, if he succeeded in relation to section 91, it would be necessary to remit to the PO the question of whether the respondent had breached the implied duty by proposing the Cap. (Unless, that is, the court were able to say that this question could admit of only one answer.)

The respondent's submissions before this court

33. The arguments advanced by Mr Furness QC in written and oral submissions in relation to the above issues were in summary as follows.

i) As to issue (i), Mr Furness submitted that the definition of Basic Salary enabled the respondent to determine that a pay rise would not count as Basic Salary. The proper construction was that the respondent had a power to determine what pay counted as Basic Salary, but this operated as a ratchet. Once the respondent had determined that a part of the employee's pay or a pay rise counted as Basic Salary, this formed part of the employee's entitlements under their employment contract and it could not be 're-determined'. However, the appellant had no right to any pay rise, so it was open to the respondent to determine how much of that pay rise would count as Basic Salary.

ii) As to issue (ii), Mr Furness submitted that the Cap did not infringe section 91. He submitted that section 91 protected the actual, accrued rights of employees. Whilst it would protect accrued rights even if the value of those rights would be received in the future, it did not apply to rights which the appellant might (or might not) acquire in the future. Section 91(1) applied where a person "has a right to a future pension", not where a person may acquire future rights to a pension.

iii) As to issue (iii), Mr Furness submitted that, even if the Cap was contrary to section 91, it could in any event take effect as a SWT agreement. The Cap was not contrary to the Scheme rules, because the Scheme looked to and followed the employment contract. This was the critical factor which aligned the present case with SWT, where the agreement was given effect, as opposed to IMG Pension Plan HR Trustees Limited v German [2011] ICR 329 where it was not.

iv) As to issue (iv), Mr Furness submitted that the respondent had not breached its duty under the pension scheme. Since the Cap was not contrary to either the Scheme rules or section 91, it could not amount to a breach on that basis. Indeed, even if the Cap was technically contrary to section 91, it did not necessarily follow that there had been a breach of the implied duty. On that hypothesis, section 91(1) would render the Cap unenforceable – but the respondent would not have acted illegally, as in the appellant's example of a pay rise which was to be undeclared for tax purposes.

Discussion and determination

Issue 1: Did the definition of Basic Salary permit the respondent to determine whether (or how much of) a pay rise counted as Basic Salary, or would it be a breach of the Scheme rules to impose the Cap?

34. In my judgment, the respondent's arguments in relation to this issue are to be preferred and the judge was wrong to decide otherwise. I conclude that, on a proper construction of the language used in the trust deed and the relevant rules, the respondent could indeed decide whether an increase in pay (or how much of the increase) counted as Basic Salary and thus was entitled to limit any increase in Basic Salary (as defined) as part of the process of determining its amount. I do not regard the conclusion that the BBC is able to determine whether (and how much of) a pay rise is pensionable as particularly startling. Given, as was accepted by the appellant, he had no contractual right to any pay rise, I see no reason why it should not be open to the respondent to determine how much of that pay rise would count as Basic Salary and therefore how much was "pensionable". In my view that is precisely what the language of the relevant definition clauses allows the respondent to do.
35. I was not persuaded by Mr Stafford's argument that because, in his submission, there were only two possible constructions of the definition of Basic Salary (viz: either (a) the respondent could make a determination in respect of any future pay whatsoever, or (b) it could not make any determination in respect of pay rises), that led to the consequence that the respondent's construction argument was wrong. Mr Stafford sought to suggest that there was nothing in the language of the Rules to confine the possibility of determinations of non-Basic Salary to future pay rises as opposed to future pay, in the way contended for by the respondent.
36. Whilst it is correct that the wording of the relevant definition sections, if construed in the way contended for by the respondent, would arguably, as a matter of language, not expressly prevent the respondent from prospectively re-characterising some percentage of existing Basic Salary as non-Basic Salary, and therefore non-pensionable going forward, the fact is that any attempt by the respondent to do so would meet with challenges by members which would be likely to succeed. For example, in such an event it would no doubt be argued on the part of active members that (notwithstanding that it was not a prima facie breach of the rules) any attempt to reduce existing Basic Salary - albeit not the total quantum of a member's pay - was a breach of a member's employment contract and the respondent's implied duty of trust and confidence, since in reality there was no actual reduction in what was, and had always been regarded as, Basic Salary entitled to be regarded as Pensionable Salary. Likewise, it would be argued that there was no genuine reason for redesignation of some existing proportion of what had always been regarded as basic pay, as non-Basic Salary other than to reduce a member's pension entitlement. Indeed one can see much attraction in the argument that, so far as existing Basic Salary was concerned, an active member had a legitimate expectation that it would not be arbitrarily reduced by a redesignation of some part of it as non-Basic Salary. In such an event, one can anticipate that there would also be arguments that any such prospective redesignation of an existing proportion of Basic Salary amounted to a breach of section 91, since it involved a forced surrender of an active existing and accrued right, in respect of existing Basic Salary, i.e. to have that element of his salary counted as Pensionable Salary in his final year of active service.
37. But that is not what is proposed in this case and these are not arguments which we need to address. I accept Mr Furness' argument that although the respondent had a power to determine what pay counted as Basic Salary (and therefore Pensionable Salary), once it had determined that a part of the employee's pay or a pay rise counted as Basic Salary, that formed part of the employee's entitlements under their employment contract and it could not be 're-determined'. I agree with Mr Furness' example that if an employee earned £40,000 p/a and this had previously counted as Basic Salary, it would be not be open to the respondent to determine that henceforth only £35,000 would be pensionable: the respondent could not unilaterally reduce the employee's contractual rights. However, the issue in relation to a pay rise - which is the issue in this case - is very different.
38. It was, or was effectively, common ground that the appellant had no right to any pay rise. In those circumstances, it was, on the construction of the rules, clearly open to the respondent to determine how much of that pay rise would count as Basic Salary. I reject the appellant's argument that the appellant had a "right" to a link between pay and pension. There was nothing in the evidence before this court, or in the parties' argument, that supported such a proposition. It was never the case that all of the employees' pay counted as Basic Salary: as defined, Basic Salary "does not include any other allowance, bonus, overtime earnings or temporary or fluctuating emoluments". Thus I see no basis for the argument that an active member had some sort of right to a link between pay and pensions.
39. Mr Stafford argued that the words "determined by the BBC" had been introduced by an amendment to the Scheme rules on 23 October 2006. Before that date the first sentence of the definition of Pensionable Salary stated that it meant "basic salary or wages from the Employer", without any separately defined Basic Salary term. (In all other respects the definition of Pensionable Salary was identical to that under the 2011 Rules, quoted at paragraph 12 above.) Mr Stafford argued that, if the introduction of a separate definition of Basic Salary and the mechanism of a determination had the effect contended for by the respondent, it would not have been possible for the actuary to have certified that the amendment was not detrimental to the interests of active members of the Scheme, which in fact occurred.
40. I disagree. I accept Mr Furness' submission that the argument based on the circumstances of the 2006 amendment, which had introduced the terminology of a determination, goes nowhere. The short answer is that the actuary had certified the amendment. It was a moot point as to how the actuary had reached the qualitative view that the amendment did not substantially prejudice members' interests. On the respondent's construction, this was correct. Moreover, in the proceedings before us there was no challenge to the legitimacy of the 2006 amendment to the definition of Pensionable Salary. Mr Stafford relied on the old definition and the role of the actuary only as an aid to construction of the 2011 definition. He did not suggest that the 2006 amendment was open to challenge or that the appellant could directly rely on the terms of the old definition.
41. In my judgment, it was undoubtedly possible for the appellant's pension to be 'reduced' (as the judge recognised in his first judgment at [43]), in the sense of pension entitlement not accruing at the same rate prospectively, as it had done in the past. For example, if the employer and an employee in the New Benefits Section entered into a genuinely new contract of employment whereby an old salary of £40,000 was to be replaced by a new salary of £35,000, the total anticipated quantum of that employee's pension (based upon his existing salary) would indeed prospectively be reduced in economic terms, since it would be based, going forward, on a lower salary than it would have been had the salary remained at £40,000. Thus, a construction of the definition of Basic Salary which opened up such a possibility is not necessarily incorrect, as the appellant sought to suggest. Indeed, the proviso to the definition of "Final Pensionable Salary" expressly envisages the possibility that Pensionable Salary (i.e. a Member's Basic Salary) prior to the increase may be reduced and sets out calculations as to how in those circumstances the relevant pension is to be calculated.
42. But the critical point is that the exercise of the power of determination contended for by the respondent does not have any reductive effect on an employee's existing pension entitlement, as at the date an increase in salary. A determination by the respondent as to what proportion of a future increase in salary was pensionable could never operate to reduce the total quantum of the anticipated pension based on the existing Basic Salary. For the above reasons, I reject the appellant's arguments in relation to issue 1 and would dismiss the appeal on this point.

Issue (ii): Did the Cap breach section 91 of the 1995 Act?

43. The first commonsense point to make is that it was in the employees' interests for the Cap to be legitimate. Otherwise the respondent might well have been forced to turn to more extreme measures, such as closing sections which were unsustainable. Indeed, Mr Stafford accepted in argument that there could have been no complaint under section 91 if the respondent had simply offered a 1% pay rise to all employees, all of which was to count as Basic Salary. On this view, where the respondent went wrong was in offering an additional 1% rise in pay (but not Basic Salary).
44. Mr Stafford's basic submission was that section 91 was intended to protect not just the accrued value of the appellant's pension, but also what the pension might become worth in the future. He sought to argue that this construction was supported by the fact that the words "to a pension under an occupational pension scheme or has a right to a future pension under such a scheme" were introduced by amendment (by the Welfare Reform and Pensions Act 1999), so as to replace the previous, narrower definition of a person who "is entitled, or has an accrued right, to a pension". He also argued that his construction was supported by the fact that what he submitted was the narrower concept of "accrued rights", in the sense defined by section 124(2), was retained for section 91(6)(a) and continued to be used throughout the 1995 Act. Thus, he submitted that the amendment to section 91(1) could only have been intended to expand section 91 beyond the limit of "accrued rights" and that, if the respondent's case on construction were correct, section 91(1) would have been amended along the lines of what is now section 67A(6), which defines a yet further term: "subsisting right". He therefore argued that section 91(1) therefore protected the appellant's right to a link between pay and pension, which informed the pension's value in the future. Although, as I have already said, Mr Stafford accepted that the appellant did not have any right to a specific pay rise in the future, he nonetheless submitted that the appellant had an existing right to a future pension based on his final pay and that the Cap infringed this right.
45. I cannot accept this argument. Whilst no doubt, as at the date of the respondent's offer, the appellant had an existing right to a future pension calculated in accordance with the rules, he had no "right", whether accrued, subsisting or otherwise, either to any future increase in salary level, or, more importantly, to any such increase in his Pensionable Salary, which any increase in designated Basic Salary would produce. All he had was an existing right that, if there was indeed an increase in his designated Basic Salary, it would be treated as Pensionable Salary under the rules. Section 91 protects the actual, accrued rights of employees. It applies where a person "has a right to a future pension"; it does not apply where a person may acquire a future right to a pension, as a result of a future increase in Basic Salary; i.e. to have a future pay increase. This analysis is supported by the decision of this court in International Management Group (UK) Ltd v German [2011] ICR 329 at [27]-[28].
46. Nor can I accept Mr Stafford's argument that the separate concepts of "accrued right" and "subsisting right" meant that a broader meaning had to be given to the words for "right to a future pension". Whether, as Mr Furness submitted, the term "right to a future pension" was intended to address pension credits, or whether the drafting differed from section 67A because section 91 needed to apply to both Scheme members and non-members, is in my view immaterial. What matters for the purposes of section 91 was whether the appellant was being invited to surrender an entitlement to a pension or a right to a future pension. In my judgment, he was not being asked to do either.
47. It is also worth pointing out that the appellant had never been required to accept the Cap in respect of all pay rises in the future. The letter to the appellant in October 2011 offering the pay rise only sought the appellant's agreement to the Cap in respect of that one pay rise. Although the respondent had indicated, in December 2010, that all pay rises to members of the New Benefits Section, Old Benefits Section and CAB 2006 would be offered on such terms in the future, that could not, in my judgment, be construed as an offer to active members to surrender their existing right that, if there was indeed an increase in their Basic Salary, it should be treated as Pensionable Salary under the rules.
48. It follows that I accept Mr Furness' argument that section 91 had no application to the appellant's agreement to the Cap, since the section only prevented the surrender of rights under the pension agreement, not a change to the content of the appellant's employment contract. The appellant's right under the Scheme rules was to a pension calculated by reference to the level of pay stipulated in the appellant's employment contract. A change to the employment contract, such as the Cap, did not involve any surrender of pension rights because those pension rights merely reflected the terms of the employment contract.

Issue (iii): Was the Cap binding and effective by reason of the application of the principle set out in SWT?

49. In my judgment, this issue does not arise for consideration, since there was no breach of section 91 and the Cap was not contrary to the Scheme rules. I do not consider that there would be any utility in expressing what would be obiter views on the hypothetical application or otherwise of the principle articulated in SWT, which was not concerned with section 91 in any event.

Issue (iv): Taking into account the above, and any other relevant, matters, did the respondent breach its implied duty of trust and confidence?

50. Mr Stafford submitted that, even if (as I have concluded) there had been no breach of section 91 or of the Scheme rules, nevertheless the respondent had breached the implied duty of trust and confidence, which he submitted was located within an overall employment 'relationship' between the appellant and the respondent. He submitted that the respondent had breached that duty by the process through which it had decided to propose the Cap. Alternatively, the Cap singled out a class of employees for less favourable treatment: the employees who did not surrender the link between pay and pension received no pay rise.
51. Mr Stafford also contended that the judge had wrongly approached the matter by wrongly concluding that irrationality and perversity were part of the test by reference to which a breach of the implied duty was to be judged.
52. I reject Mr Stafford's arguments under this head.
53. First, I do not accept that the judge wrongly concluded that irrationality and perversity were part of the test as to whether there had been any breach of the implied duty duly of trust and confidence. An analysis of his second judgment demonstrates clearly that he did not do so. He expressly recognised that the PO had considered both whether the respondent had acted: (a) irrationally or perversely; and/or, (b) without reasonable and proper cause, in a manner that was calculated or likely to destroy or seriously to damage the relationship of trust and confidence to be expected between the respondent as an employer and its employees. He similarly identified the parties' competing approaches to the legal test, and went on to consider whether the PO was correct to reach his conclusion that there was no breach on either basis. In so doing, he took into account both parties' formulations of the test and arrived at the conclusion that there was no breach on either basis. In other words, he clearly concluded that the respondent was not in breach of the implied duty, whether that duty was framed by reference to a test of irrationality or perversity or by reference to the test set out in Malik v BCCI [1998] AC 20 at 35D, as advocated by the appellant. He did not elide the two tests.
54. Both the PO in his second determination, and the judge in his second judgment, concluded that there had been no breach by the respondent of its duty not to conduct itself in a manner calculated or likely to destroy or seriously damage the relationship of trust and confidence with its employees without reasonable and proper cause. The judge carefully analysed the various allegations made by Mr Stafford on behalf of the appellant which were said to amount to a breach of the contractual implied term of trust and confidence. These included, but were not limited to, allegations that:

i) the respondent deliberately placed financial pressure on the appellant to surrender part of his existing bundle of pension rights;

ii) the respondent threatened to inflict on the appellant "the erosion of the economic value of his pay and the erosion of the economic value of his pension benefits" and to "deprive him of any real choice in the matter";

iii) the respondent wrongly singled out a class of employees for less favourable treatment than others (namely those members of the New Benefits Scheme who refused to accept the 1% Cap, the less favourable treatment being that they would not receive the pay increases which other members of the section would receive);

iv) the respondent acted for a collateral purpose in that the various options offered to the appellant and other employees in the same class, and the manner in which such proposals were presented to them, were designed to achieve a more agile workforce by making the Scheme less attractive for long-serving and underperforming staff.

55. In my judgment, the judge's analysis of the relevant facts, and his conclusion that there was no breach of the respondent's duty of trust and confidence, cannot be faulted. The respondent's conduct had to be assessed against the reality of the background that the respondent was faced with a multi-billion pound deficit in the Scheme and where the trustees, the unions and the respondent all agreed that something had to be done. The evidence demonstrated that the deficit in the Scheme was so substantial that, absent reform, the respondent would have needed to increase its contributions to the Scheme from the equivalent of 3.5% of the licence fee to around 10% of the licence fee. That would have been unaffordable and would have damaged its ability to maintain the quality and range of its services to the licence fee payer.
56. Moreover the allegations of discrimination and improper motive at the end of the day went nowhere. Contrary to Mr Stafford's submissions, the Cap did not involve singling out a class of employees for less favourable treatment, in the sense identified in Imperial Group Pension Trust Ltd v Imperial Tobacco [1991] ICR 524 at 533. That was because all employees were given the same choice – either to accept the Cap or not - so there was no question of differential treatment. Likewise, the judge addressed the evidence of improper motive in some detail at [48] to [61] of the second judgment and correctly concluded inter alia:

i) that, in the light of the PO's findings, it could not be suggested that the collateral purpose was the sole purpose of the respondent's decision to impose the Cap;

ii) that what the respondent did was clearly a response, and primarily a response, to the deficit;

iii) that the evidence of a Mr Myers was wholly insufficient to provide a foundation for an allegation that the respondent had a strategy of ridding itself of older employees and using the deficit as a cover for achieving that purpose;

iv) that in any event, the respondent was entitled to choose the course which it did rather than the alternative course suggested by Mr Bradbury, or indeed any other course;

v) that, even if the alleged collateral purpose had been one of a number of purposes in play in informing the respondent's actions, there would have been no breach of the implied term.

57. I agree with the judge's conclusions for the reasons which he gave.

Disposition

58. For the reasons set out above, I would dismiss this appeal.

Lord Justice Henderson:

59. I agree.

Lord Justice Lewison:

60. I also agree.

Note 1   All emphasis in this judgment in bold is supplied.    [Back]