Employer did not breach implied duty of faith by making changes to its pension scheme

The Court of Appeal has ruled that IBM did not breach its implied duty of good faith to members by making changes to its defined benefit pension scheme.  

Speedread

The Court of Appeal has given its ruling in one of the most significant cases in years for pension scheme employers.   The key matter before the Court was whether, in making changes to its defined benefit (DB) pension arrangement, IBM had breached its implied duty of good faith to members.  The High Court ruled that it had, finding that IBM’s communications about earlier pension changes had created "reasonable expectations" that those changes were long term and that there would not be further changes.  The Court of Appeal has overturned the decision of the High Court, ruling that although members’ expectations were a relevant factor to take into account, the High Court had been wrong to give them "overriding significance".  The correct test to apply was whether the employer had acted in an arbitrary or capricious way, and in a way that no reasonable employer would act - and on this basis, IBM had not breached its duty of good faith.   
  

Facts

The facts of the case (IBM United Kingdom Holding Limited v Dalgleish) actually begin in 2004, when IBM tabled proposals to the Trustees to reform its DB pension arrangement. These proposals involved an increase to member contributions for the IBM contributory DB scheme and a reduction in the accrual rate for the IBM non-contributory DB scheme.  A further round of pensions changes followed in early 2006 when IBM gave members the option to remain in the DB schemes, subject to an agreement that only two-thirds of future pensionable salary increases would be pensionable, or to transfer to a new enhanced defined contribution section with retention of a final salary link on their past service defined benefits.   Importantly, as part of this process, IBM gave clear indications to members that there were no further plans to alter the pension arrangements and that the changes being made were “long term”.  

However, by 2009, IBM had formulated further proposals to close the scheme to accrual and introduce agreements under which future pay increases would not be pensionable – and, unsurprisingly, the members issued proceedings to examine the lawfulness of these proposals.  In the High Court, Mr Justice Warren found in favour of the members, holding that communications at the time of the pre-2009 reforms had created “reasonable expectations” for the active members of the scheme, namely expectations that “give employees a positive reason to believe that things will take a certain course”.   In Warren’s view, the 2009 proposals conflicted with these reasonable expectations, and as a result, IBM had breached its duty of good faith to members.

Judgment

The Court of Appeal has ruled that although members’ expectations were a relevant factor to take into account, the High Court was wrong to give them "overriding significance".  The correct test to apply was whether the employer had acted in an arbitrary or capricious way, and in a way no reasonable employer would act  - and on this basis, IBM had not breached its duty of good faith.   

Implications

The IBM members have indicated that they will not be making a further appeal to the Supreme Court, so this decision will provide some comfort to employers who have embarked on earlier rounds of pensions reform and who, following the High Court decision, were concerned that they may have been forced to unwind those changes as a result of earlier communications to members.  

It is also noticeable that this change reflects a shift in judicial thinking towards the employer, compared to a line of earlier pension benefit cases which were settled in favour of the members.  This is perhaps understandable, given the fact that DB pension arrangements are now operating in a completely different financial environment to 20 years ago, when many schemes carried a funding surplus and sponsoring employers did not face the same pressure on their cash flow.  

And of course, reasonable expectations have not been put to bed forever – they are just one factor which courts should pay attention to in future (albeit not a determinative one) when considering whether any changes have been lawfully made.   In particular, some commentators have suggested that the concept of reasonable expectations could form the basis of a successful estoppel argument in the future – namely that where members’ reasonable expectations have prompted them to follow a particular course of action in reliance on information supplied by their employer, this may be sufficient to estop the employer from making further changes.  So for now, although the Court in IBM turns the dial back in favour of pension scheme employers, careful planning will still be needed around implementation of pension changes and in particular how the proposals are communicated to members.