Court of Appeal rules on the case of IBM v Dalgleish and others

The case is likely to be of great importance to any employers who are considering making pension scheme changes.

The Court of Appeal has allowed IBM’s appeal against a 2014 High Court ruling that it had breached its ‘Imperial’ duty of good faith towards it employees in relation to a programme of pension schemes changes introduced in 2009, because they conflicted with members’ reasonable expectations about the provision of future pension benefits.

The case is likely to be of great importance to any employers who are considering making pension scheme changes.

Background

This is a long running case and the facts cover a lengthy period.

The case concerned two occupational pensions schemes established for UK employees of the IBM group of companies: the IBM Pension Plan (Main Plan) and the IBM IT Solutions Pension Scheme (I Plan).

Both pension schemes have the same trustee.

Project Ocean

In 2004, IBM made a number of proposals (known as “Project Ocean”) which included a proposal to increase members’ contribution rates, and a commitment by IBM to pay £200 million each year for three years towards scheme funding deficits.

Project Soto

In late 2005, and 2006 IBM presented further proposals (known as “Project Soto”) which would give scheme members a choice between (1) remaining in the schemes (but on the basis that only two-thirds of any future salary increases would be pensionable), or (2) transferring to a newly created defined contribution (DC) section of the Main Plan accruing enhanced DC benefits for future service, while retaining final salary-linking for their accrued defined benefit (DB) benefits.

When explaining the proposed changes under Project Ocean and Project Soto IBM issued a number of member communications including a webcast by IBM’s HR director, and various explanatory documents.  

As part of their discussions and communications IBM indicated that there were no further plans to change pension arrangements, and the changes were viewed as “long term”.

Project Waltz

However, in 2009, after the implementation of Projects Ocean and Project Soto, IBM announced that further changes to its pension arrangements were necessary, and presented yet further change proposals to members and the trustee (these were known as “Project Waltz”).

Project Waltz contained five key elements:

  • The closure of the ‘I Plan’ and the DB section of the ‘Main Plan’ to future accrual.
  • Allowing former active members of both schemes entry into either the DC section of the ‘Main Plan’, or a new personal pension scheme set up by IBM.
  • Obtaining the members’ agreement that future pay increases would not be pensionable in relation to their accrued DB benefits.
  • The introduction of a cost-neutral early retirement policy to replace an existing favourable early retirement policy.
  • An early retirement window during which active defined benefit members of the Main Plan would be able to apply for early retirement with the benefit of an existing favourable early retirement policy.

The ‘Project Waltz’ proposals received a strong adverse reaction from members, and required the agreement of the trustee before they could be implemented.

The trustee refused to agree to the proposed changes without a declaration from the courts that the changes were legally valid.

An application to the High Court was therefore made by IBM; and pending the outcome of the court proceedings Project Waltz was implemented on a provisional basis.

High Court decision

In 2014, the High Court held that the changes proposed by Project Waltz were invalid as IBM has acted in several respects in breach of its so called Imperial duty of good faith to its employees.

The Imperial duty of good faith is a concept that originates from a 1991 employment law case (Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd) in which the court held that “In every contract of employment there is an implied term that the employers will not, without reasonable and proposer cause, conduct themselves in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between employer and employee”.

The High Court held that a ‘reasonable expectation’ was an expectation as to what would happen in the future that had been created by an employer’s own actions, and in relation to matters over which an employer had some control, which gave employees a positive reason to believe that things would take a certain course.

The High Court determined that IBM had breached its Imperial duty of good faith because the Project Waltz changes conflicted with members ‘reasonable expectations’, created by IBM’s communications during Project Ocean and Project Soto, that no further changes would be made.

The Project Waltz changes were therefore held to be invalid.

IBM appealed the decision on a number of grounds.

Court of Appeal decision

The Court of Appeal allowed IBM’s appeal.

The Court of Appeal agreed that members’ reasonable expectations were a relevant factor to be taken into consideration when making changes to occupational pension schemes. However, they have no special status and something more was required to show that there had been a breach of the Imperial duty.

The court held that the correct test to apply when determining whether the Imperial duty had been breached was a two limbed ‘rationality’ test:

  • First, whether only relevant matters (and no irrelevant matters) have been taken into account by the decision-maker; and
  • Second, whether the decision was such that no reasonable decision maker could have reached it.

The Court of Appeal held that the High Court’s decision had been flawed as it “accorded an overriding substantive significant to the reasonable expectations such that they could only lawfully be disappointed in a case of necessity”… “Members expectations, even if they satisfy the judge’s criteria for a reasonable expectation, do not constitute more than a relevant factor which the decision maker may, and where appropriate should, take into account in the course of the decision making process”.

“To put the existence of reasonable expectations on the same footing as the existence of a separate binding legal obligation (the Imperial duty of good faith) seems to us to be revealing of the judge’s attitude, which formed part of his eventual reasoning, that the existence of reasonable expectation has a special significance in relation to the decision making process, so that it is not merely one among may relevant factors which should be considered and taken into account in the course of the decision making process”.

It followed that the High Court was wrong to find that IBM had breached its Imperial duty of good faith when implementing Project Waltz.

Historic communications should have been taken into account, but should not have been given prominence over other relevant factors including the costs associated with running the pension schemes and the employer’s wider business needs.

The decision means that IBM can now implement the changes envisaged by Project Waltz.

Comment

The decision will come as a relief to employers who have made changes to their pension arrangements over the years and are considering making further changes.

While it remains important for employers and trustees to plan benefit change and scheme closure exercises carefully, decision makers can be reassured that a pragmatic approach can be taken when weighing up any reasonable expectations that have created by what members have been told or promised in the past.

However, it is important to note that members’ reasonable expectations remain a relevant factor that must be taken into account. Failing to consider such expectations may still lead to a decision being found to be unlawful due to a breach of the Imperial duty of good faith under the two limb ‘rationality’ test outlined above.

We can provide legal advice and support to help you with all legal aspects of pension scheme benefit change and scheme closure projects.

For further information please contact Dei Harries, Associate at Weightmans LLP on 0151 242 6865 or email dei.harries@weightmans.com

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