Pensioners in the BP Pension Fund have said they are considering taking legal action after BP decided not to follow its pension trustees’ recommendation to allow a discretionary pensions increase of 9% instead of 5%. BP points to fairness across the global workforce, while pensioners say they accepted below-market salaries in the belief they had an inflation-linked pension. 

  

Members of a new pensioner group are keen on exploring legal routes and are “ready to financially support that”, a spokesperson for the group told mallowstreet, saying the pensioners believe the scheme’s large surplus should benefit retirees during the cost of living crisis. The group says it currently has about 1,200 members who joined in the past six weeks, out of about 33,000 pensioner members in the 60,000-member scheme.  

 

The decision not to inflation-proof pensions for the first time despite a trustee recommendation has led to what the pensioners claim is an 11% cut in real income over the past two years. The group has since submitted evidence to the Work and Pensions Committee’s inquiry into defined benefit pension schemes. 

  

Nick Coleman, a pensioner and former BP executive, said the pensioners wrote to the trustees in mid-June to discuss the issue but have not received a response so far.  

 

“At the same time, we started to explore law firms and barristers because we are getting ready to instruct them – one, to double-check what conclusion they come to and see if we made a mistake, two, if it had to be further escalated, we’d start it,” said Coleman.  

 

Although the scheme rules give BP discretion over increases beyond 5% RPI, the pensioners believe the company should have reasonable grounds on which to reject such increases. They also argue that the language in the trust deed suggests any surplus should be used for discretionary increases before it can be returned to BP, and that past scheme communications referenced inflation-linking.

 

A spokesperson for BP confirmed that for the May uplift, the company declined the trustees’ request for an additional 4% to be paid, saying: “This was a difficult decision that we took only after careful consideration and balancing the interests of our many stakeholders, particularly employees and retirees, across the world. Many of BP’s retirees are outside the UK and most are not in inflation-linked final salary pension schemes.”  

  

The spokesperson declined to comment on the pensioners’ potential legal action. 

 

BP’s DB pensioners feel they ought to receive higher increases not just because the £20bn scheme has a £6bn surplus. According to at least two of them, BP paid below market salaries when the scheme was open, and would point to its inflation-linked, non-contributory pension when questioned about salaries. Pensioners say employees accepted the lower rates and stayed with the company in return for the retirement income promise.  

 

DB members who were still working were compensated for the scheme closure to accrual in 2021, as BP decided to give a 35% cash allowance to employed DB members in lieu. This was reduced to 20% in April this year, while non-DB members had their cash allowance increased from 15% to 20%, according to BP. 

 

 

BP is not the only firm having a disagreement with some or all of its DB pensioners, with high inflation sparking debates over increases and how these were communicated to members in the past. 

 

David Griffiths, a partner at law firm Squire Patton Boggs, believes there will be more disputes about surplus distribution in future brought by scheme members, even if “it’s a difficult argument to run unless it’s expressly in the scheme rules”. 

   

While scheme rules differ in regard to who can decide where the surplus goes for ongoing schemes, a significant number of schemes give the trustees unilateral power on windup, said Griffiths. This is because rules were typically drafted before the advent of pensions risk transfers, so if a scheme wound up it would have been because the employer ceased to exist, for example. He has seen schemes that have distributed surplus to members before windup, but this was as a one-off uplift, rather than a pension increase, to avoid impacting the following increases. 

 

According to the latest annual report of BP, which booked a record £22bn profit last year, “the company is entitled to a refund of any remaining assets once all members have left the plan”. 

 

BP declined to say whether a pensions risk transfer was on the cards. 

 

For Griffiths, there is a fairness issue with providing inflation increases to pensioners. The directors of BP are obliged to act in the interests of company shareholders, he noted, with many people holding some BP shares as part of their pension investments, including defined contribution savers. 

 

“It’s not good intergenerationally, but I don’t suppose pensioners would have any reason to care about that if they can articulate a case and say, 'We have an expectation that this money would be used as a windfall rather than any other purpose',” he remarked. 

 

Employers are mostly reluctant to give benefit uplifts because of fairness across the workforce, with the DB population becoming a dwindling part of this – and one that has more generous benefits than the current employees, said Emma King, a partner at law firm Eversheds Sutherland. 

 

“The issue is if you give a discretionary increase now it’s baked into the future,” she added, as all future increases will be on top of this. 

 

The scheme rules are often the first port of call for understanding who has the power to grant discretionary increases and what can happen with a surplus, with most of them specifying that a decision to enhance benefits beyond what is promised has to be taken with the agreement of the employer.

 

Where employers can have surpluses reimbursed, they tend to do so, King said – even if that means paying a 35% tax charge.
 

       

     

 

Should a pension fund surplus be used to enhance benefits during high inflation?