Newsbrief No 44 22 May 2002

Clause 11. COURT OF APPEAL FINDS IN FAVOUR OF ABAP.

On Monday 20th May 2002 the Court of Appeal delivered its Judgement. The decision is a vindication of the ABAP position held for the last 12 years.

JUSTICE HAS AT LAST BEEN DONE.

As advised in Newbrief No.43, the Court of Appeal was asked to consider 3 principal issues. The Hearing, that lasted 4 days instead of the expected 3 days, commenced on the 25th February 2002. The principal issues were:

1. The principal scope of a Trustees Scheme under Clause 11(b) for disposing of Surplus.

2. Whether Clause 11(b) permits the Trustees to create Reserves out of a Disposable Surplus.

3. Whether Clause 11 permits refunds to be made to BA from a Disposable Surplus.

Issue 1. BA argued that a Clause 11(b) Scheme was limited to the matters specifically mentioned in Clauses 11 (d) & (e). (Mainly the BA Contribution Holiday). They opposed the use of a Disposable Surplus for any other purpose. They also submitted that if this argument was not admitted, then no Benefit Improvements should be granted by the Trustees unless they could guarantee that BA would never again have to contribute to APS.

These arguments were rejected by the Court of Appeal!

It decided that Clause 11(b) imposes a duty on the Trustees to dispose of all the Disposable Surplus, and that there is nothing to restrict Disposable Surplus to only a surplus that can be disposed of under Clauses 11 (d)&(e).

They further decided that Clause11 is fettered by Clause 18; and that any Clause 11 Scheme that they may make involving constitutional changes would be subject to the amending power under Clause 18.

Issue 2. The Court decided that while the Trustees have duty to dispose of all the Disposable Surplus, the Trustees may allocate all or part of it to a Reserve. The Trustees must however make a decision as to the destination of the Surplus because they are required to make a "Scheme". They cannot simply decide to defer a decision or decide to do nothing.

We wanted any Reserve made by the Trustees to be "ring fenced". While the Court did not accept that the Reserve should be "ring fenced", it did seek to define a Reserve : It is defined as Reserve against contingent liabilities that may occur in the future, or that will occur in the future but that are uncertain as to the amount (even if the Scheme Actuary has already made a provision in respect of the same matter). The Reserve should: "Generally relate to the estimated present value of the liability not the full amount".

The Court rejected the Trustees argument that they could make Reserve against any future liability under future Clause 24 Notices served by BA. The Court confirmed that the Trustees when disposing of a Surplus may only take into account Clause 24 Notices that had actually ( our italics) been served. Issue 3.

The Court of Appeal decided that the Trustees have no power under Clause 11(b) to make a return of contributions to the Employer from the Disposable Surplus.

WHAT DOES ALL THIS MEAN ?

You will recall from previous Newsbriefs that every 3 years the APS Actuary has to undertake a Valuation of the Scheme Assets and Liabilities. If there is a surplus of assets over liabilities (as there has been since 1989) the Actuary must certify how much of the surplus is "Disposable Surplus". Under Clause 11(b) of the APS Trust Deed, the APS Trustees then have to "make a Scheme" to dispose of the "Disposable Surplus". Under Clause 11(d) the Disposable Surplus must first be used to make up any contribution deficiency, and then to give BA a Contribution Holiday of up to 30 years. The Trustees MUST then dispose of any remaining Disposable Surplus.

Our interpretation is that the Actuary now has to formally certify whether or not there is a Disposable Surplus and the amount of that surplus, which the Trustees must then dispose of by "making a Scheme". This was not done in the 1989, 1992, & 1995 Valuations. The first Certification was in 1998 -- after years of ABAP lobbying.

If the Actuary certifies that there is a Disposable Surplus, the Trustees must "make a Scheme" to dispose of it. That Scheme must first grant the Employer a Contribution Holiday of up to 30 years. If there is a surplus left after that, the Trustees must dispose of ALL of it. This something they have NEVER done with any surplus since surpluses first arose in 1989.

The Trustees may dispose of that "Residual Surplus" by any or all of the following:

a) Making of a Reserve (subject to the limitations imposed by the Court of Appeal).

b) Benefit Improvements.

c) New Benefits for APS Beneficiaries.

d) Reducing or suspending Employees Contributions.

They cannot as they have done in the Past, simply leave some Disposable Surplus without defining what is to be done with it, thus making it available for the Employer's use under Clause 24.

In the last Valuation by the Actuary (March 2000) there was a certified Disposable Surplus of £150m. This was only sufficient to provide BA with a Contribution Holiday of 4 Years. The next Valuation will be in March 2003. If the surplus increases beyond that required to give a full 30 year Contribution Holiday, the Trustees will then have to consider how to dispose of the residual surplus. In that case one of the options available to the Trustees will be to consider making Benefit Improvements.

BA cannot now have return of Monies out of the Fund from any surplus. Although BA have said they have never asked for it, their Counsel spent a considerable time arguing for it at the Hearing . The only way BA could obtain a payment is by making an application to OPRA (Occupational Pensions Regulatory Authority). There would need to be a statutory surplus before this application could be made. We would like to think that this is unlikely to happen, given the guidance by the Appeal Court on how the Trustees must dispose of all the Surplus (thus ensuring that any surplus does not become too large).

The other area that has caused us concern is the use by BA of Clause 24 (this was not the subject of the Court of Appeal Judgement and is referred to separately below).

The APS Representative Beneficiaries are delighted that BA is not entitled to a return of Surplus, and that the Trustees and the Actuary must only use the Reserves for their designated purpose.

The APS Representative Beneficiaries for the Active Members and Pensioners have, upon Counsel's Advice, decided not to Appeal the Judgement.

We understand that neither BA nor the Trustees will Appeal it either.

Hopefully the scene has been set now for some benefits for APS beneficiaries, providing the surplus in the Scheme grows sufficiently. BA has been defeated in its attempts to deny benefit improvements, and the Trustees have been given clear and unambiguous guidance on their duties related to their disposing of any Disposable Surplus under Clause 11. We shall watch their decisions with interest.

CLAUSE 24 COMPLAINT.

Roy Hutchings and the Members of the ABAP Committee (excluding the Chairman because of his role in the Court Hearings) lodged a Complaint with the Pensions Ombudsman challenging the validity of Clause 24 of the APS Trust Deed (and its predecessor, Rule 34 of APS part VI).

Clause 24 permits BA to direct benefit improvements "subject to the payment to the Fund by the Employer of such sum or sums if any as maybe advised by the Actuary as may be necessary". For example between March 1998 & March 2000 BA awarded discretionary benefits of £16.5m. In the year March 2000 to March 2001 BA directed Clause 24 Complaint contd… benefit improvements costing £3.48m. In both cases the Actuary advised that BA did not have to pay. Consequently they were funded entirely out of APS funds.

These benefit improvements were made to Active employees not to Pensioners.

From 1989 to March 2000 the cost to the APS fund of Clause 24 use has been £339m.

Of that £139m was spent in 1989 in granting benefit improvements to secure Trade Union agreement to the 3 year pay deal. There is a background on the way the changes were made that may interest Members. Members will be distressed to learn that the Trustees approval of Rule 34 in 1986 was invalid at that time because the Meeting approving the Rule change was inquorate (only 7 Trustees were present instead of the required 8) The amending Deed was signed by Mr R Ayling & Mr J Welsh, who according to the Deed had been authorised to undertake this task by the Trustees at a Meeting on 16th July 1986. No such Authorisation is recorded in the minutes of the Meeting.

In 1989 the Trustees agreed to make changes to APS Parts I, IV, V, introducing a Rule similar to Rule 34 of Part VI. This was in order to permit those Active Members who remained in those Parts to receive those benefit improvements that BA had negotiated with the Trade Unions in November 1989. BA had agreed to these benefit improvements in order to secure TU agreement to the 3 year pay deal.

In May 1990 the Trustees agreed a minor change to APS Rule 34 in addition to the changes to the other parts of the APS Rule, and Captain Feasey & Mr Galbraith were authorised to sign the amended Deed.

However the Rules of these Parts were not changed, instead the APS Trust Deed was amended by the introduction of Clause 24, which is identical with Rule 34 of APS Part VI. There is no record of the Trustees approving a change of the Trust Deed, and the amending Deed itself is deficient, in that there is no permission to close Rule 34 of APS Part VI.

The Principal grounds of the Complaint are:

1. The failure of BA to pay for benefit improvements made under Clause 24, and the Trustees failure to obtain payment from BA constitutes maladministration by BA and the Trustees because Clause 24 is invalid in whole or in part.

2. Clause 24 is invalid insofar as it purports to reopen APS to new Members (including potentially members of NAPS) when the Scheme was closed to new Members in 1984.

The Complaint asks the Ombudsman to direct that BA should pay the Trustees the current actuarial equivalent of the benefit increases that BA has directed under Clause 24/34 (i.e. Reimburse APS for the cost of the additional benefits). There are many legal arguments surrounding these points that we will not report in detail. The Complaint was submitted to the Pensions Ombudsman in February 2002. He has said that it must first be submitted to the Trustees through the APS Internal Disputes Clause 24 Complaint Resolution Procedure. It has therefore been submitted to the Secretary to the Trustees who on 1st May 2002 rejected the Complaint.

Under the Internal Disputes Resolution Procedure, the matter has now been submitted to the Trustees for their decision. In the absence of a satisfactory decision, the Complaint will then be submitted to the Pensions Ombudsman for his determination.

Closure of New Airways Pension Scheme.

BA announced on Friday 10th May 2002 that it was closing NAPS to new entrants from Autumn 2002. The reasons given were: " its two major pension schemes ran up a shortfall of £394m". "The new accounting Rule FRS17", and "rising life expectancy".

We have written to the Chairman of Trustees (11/05/02) asking for separate financial details for APS & NAPS.

He has replied (15/05/02): "I understand that British Airways has done work done on the FRS17 basis, which is where the figure of £394m comes from. FRS17 is not a Trustee matter, and the Trustees have not been informed of the separate figures for APS & NAPS. As you know, FRS 17 is a" snapshot" view for the purposes of a sponsoring employers balance sheet, and is not of course, the basis on which the Schemes normal Valuations are made. Consequently beneficiaries should not in any way be concerned about the figure appearing in the press. As for the closure of NAPS to new employees, British Airways has said that no existing members or pensioners of either APS or NAPS will be affected thereby".

ABAP hope all Members and Pensioners of APS & NAPS are reassured by this letter.

FRS17 was supposed to produce more transparency into Pensions and their sponsoring Company's accounts. We therefore have to say that we are concerned at the lack of transparency. We suspect that the lumping together of APS & NAPS finances is simply to make the deficit on NAPS appear smaller by offsetting any APS surplus.

Many Members have read press reports on the BA statement and Members are concerned about the position of their Scheme, be it APS or NAPS.

Given the current concern about Final Salary Schemes and the BA recently announced losses and financial problems, bland statements that .."beneficiaries should not in any way be concerned about figures appearing in the press" and " BA has said that no existing members or pensioners will be affected thereby" are simply: Not Good Enough.

Reassurances in this vein have been made in other recent financial debacles. Full and proper information is needed now from both BA and the Trustees (who have a duty to look after our interests, not the interests of BA).

We need to be told the following:

1. The separate financial position of APS & NAPS.

2. What the Employer's future liability is in respect of APS, and how much has been taken from the £150m set aside for the 4 year Contribution Holiday for Clause 24 purposes ?

3. What are the past service liabilities for NAPS ?

4. What method of valuation will now be used on NAPS as it is now a closed fund ?

5. What does the Scheme Actuary assess as the future service liabilities of NAPS ?

6. What is the position of APS if the Employer goes into liquidation or is taken over?

7. What is the position of NAPS if the Employer goes into liquidation, or ceases payments to NAPS ?

Chronology.

APS Beneficiaries may care to reflect over the happenings of the passed 12 years.

1984 APS is Closed. NAPS is Opened. Reason: APS too costly.

1986 Rule 34 introduced.

1989 First APS surplus - Employer 30 year Holiday, BA uses £136m of the remaining surplus for benefit improvements under Clause 24 for active members as a trade off to clinch a 3 year pay deal. APS was too costly in 1984, now benefits improved - reason :"need to recruit and maintain high calibre staff ".

1992 Valuation assets boosted by actuarial assessment otherwise APS in deficit. Employer contribution holiday continues.

1992 December: APS in deficit.

1992 New valuation method introduced to NAPS. This method criticised in Actuarial report commissioned by BALPA.

1993 December APS in deficit. But Employer augmentations still continue.

1995 APS back in surplus. Employer Contribution Holiday continues.

1998 APS Disposable Surplus is Certified for first time. 1999 March. Trustees consider benefit improvements at meeting. Cannot agree. Defer decision to May 1999.

1999 May BA proposes Merger, surplus subsumed into Merger proposal. Trustees decide that if Merger proposals fail, the surplus will come back for benefit consideration.

1999 July. Trustees "are minded to agree Merger proposals". Proposal to go to Court for Approval.

1999 August. Pensioners & Actives reject Merger proposal.

2000 October. Trustees on Actuary's advice reject Merger proposal. Trustees do not keep promise to consider disposal of 1998 Valuation surplus.

2000 Trustees decide to ask Court for Interpretation of Clause 11.

2001 February. Court Hearing on Clause 11.

2001/2002 Fall in value of Equities. September 11 New York. BA Financial problems.

2002 Court of Appeal Hearing. BA closes NAPS to new entrants.

For any BA Manager reading this chronology there is a lesson to be learned.

Future.

We refrain from calling yet again for the Trustees involved in the events of the past 12 years to resign. But we are sure Members will feel that in view of the foregoing , they should "do the decent thing ". They will not, of course.

So, Mr Eddington what are you going to do ?

The Membership of APS is now over 90% Pensioners, there are less than 4000 active Members, some 1000 or so have crystallised their pensions and so are non contributing.

The APS Trustee Board comprises mainly of NAPS Members, on both the Management appointed and Staff elected sides, with the exception of the 2 Pensioner Trustees. The composition of the Board should be reviewed under the Pensions Act "Opt Out" proposals in 2003.

What are you proposing to do, Mr. Eddington ?

You came to BA with the reputation of a "people person ", a good guy, honest and straightforward. Now is the time to demonstrate this to us.

Let BA propose a new board for APS, comprising of Trustees with an Independent Chairman. The Trustees to comprise equal numbers appointed by BA and elected by APS beneficiaries. Show us whether you really are a good guy. Or just another Manager in the BA Charm School mode.

The facts speak for themselves, 90% Pensioners and 10% Actives. The decision is yours !

YOU INHERITED THE MERGER PROPOSAL FROM YOUR PREDECESSOR.

This decision is down to you.

Finally.

Our thanks to the ABAP Members for their unswerving support over the past 12 years. You, and particularly the pre 1989 Pensioners, have contributed to our funds to pay for professional advice. Without you and your support we could not even have begun the challenges we have mounted. The cost has been heavy, particularly over the past few months.

Many Members have regrettably died since we started in 1989. A few have given up the struggle, but the vast majority has remained steadfast in their support. Thank you.

This not an appeal for more Funds, although many have volunteered more if needed. It is an appeal to all the other APS Pensioners and Active members who so far have not joined us in this unfolding fight to save our pensions. Come On! Without new support two things will happen:

1. The existing Committee will disappear.

2. ABAP will cease to function.

We have done our share, and more, it is now up to You ! What is more important to you. Your round of golf or other hobby, or the Security of your Pension. You will surely appreciate that enjoyment of the Former is dependent on the Latter.

It is Now Up To You.

The Committee of ABAP 22nd May 2002.