British Airways (BA) has reached a settlement with the trustees of one of its two defined benefit (DB) pension schemes in relation to disputed discretionary benefit increases.

The airline has been in dispute with the trustees of the £7.7bn (€8.9bn) Airways Pension Scheme (APS) since 2013 over a 0.2% additional uplift in benefits, which the company had said risked making it harder for the scheme to close its funding deficit.

The two parties were scheduled to meet in the UK’s Supreme Court later this year after the trustees appealed against the latest ruling. However, improvements in funding levels and a major de-risking transaction have made the additional payments more palatable for BA, according to a letter to members from the APS trustees.

The agreement between BA and APS means the trustees will be permitted to award further discretionary increases from 2021 to ensure benefits keep pace with RPI inflation. The increases will be subject to “some affordability tests”, the trustees said.

The APS trustees said they had agreed with BA that the terms of the legal settlement “better serve the interests of the members as a whole than proceeding with the appeal”.

Once the settlement is approved by the UK High Court, payments would be made “as soon as practicable, backdated to 8 April 2019”, the trustees added.

British Airways

Source: BA

British Airways first disputed the discretionary payments awarded by the trustees in 2013

As well as future discretionary increases, the settlement also includes a one-off lump sum payable to pensioners to compensate for the lack of discretionary increases between 2013 and 2019, the period of the litigation process between BA and APS. This is estimated to be worth about 4.6% of pensions in payment as of 31 March 2019.

“Certain increases” would be granted to pensioners and deferred members relating to this period as well, according to the APS trustees. Next year, members will receive a benefit increase equal to 75% of the difference between RPI inflation and CPI inflation.

In return for the increases being permitted, BA will stop making deficit recovery contributions to APS. Payments would restart if the scheme’s funding level fell below 100%, the trustees said.

The trustees said the discretionary increases were expected to be affordable without additional payments from the sponsor, but BA said it would set aside £40m as a contingency fund.

Funding improvements

One of the main reasons behind the settlement was a £4.4bn insurance buy-in finalised in September 2018, securing more than half of the APS’ liabilities with Legal & General. The deal remains the UK’s largest ‘buy-in’ transaction ever completed.

In addition, the funding level of the APS had improved due to a de-risking strategy to shift the scheme out of equities, the trustees said.

“Together, these factors have effectively reversed the funding deficit and APS is expected to show a substantial surplus at the next valuation relative to [CPI inflation] increases,” the trustees said. “This surplus would be used to deliver the proposed package of discretionary increases.”

The APS entered into a £1.6bn longevity swap transaction with Partner Re and Canada Life Re in September 2017 to insure against increases in members’ life expectancy.

The scheme is one of two main DB schemes sponsored by BA. The £16.9bn New Airways Pension Scheme was closed to future accrual from 31 March 2018, and was replaced by a new defined contribution arrangement.