Pension Scheme Changes: Beware the Duty of Good Faith

Employers need to take care when communicating with their staff over pension scheme changes to ensure they do not breach the implied duty of good faith. 

In IBM UK Holdings Ltd v Dalgleish, IBM proposed to make changes to its defined benefit pension scheme, including closing the scheme to future accrual of defined benefits. This was the third significant restructuring of its pension scheme since 2004. The High Court had to consider whether the current proposals breached the employer’s implied duty of good faith. It found that communications from IBM in relation to the previous restructuring exercises indicated that there would be no further changes to the defined benefit scheme over a long-term horizon and that in the light of those communications, pension scheme members had a reasonable expectation that benefit accrual would continue. The disappointment of those reasonable expectations by proposing the closure of the scheme to future accrual was a very serious matter going to the heart of the relationship between IBM and its employees. No reasonable employer in IBM’s position would have proposed such changes and IBM had breached its duty of good faith. 

The judgment demonstrates the need for employers to take care when communicating with pension scheme members over proposed changes to pension schemes and ensure they consider the impact of their communications on members’ expectations. When considering making pension scheme changes, employers need to review previous communications and assess what expectations members might have as a result of what has been said previously. A breach of the duty of good faith can result in benefit changes being unwound and so can cause real problems for employers.

Of importance also is the Court’s decision that remedies for breach of an employer’s consultation obligations are not limited to those set out in Regulation 18 of the Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006. These Regulations require an employer to consult about listed pension changes. The Court held that Regulation 18 does not preclude a claim for breach of an employer’s contractual duty of good faith. Where the manner in which any consultation exercise is conducted breaches that duty, including, for example, where information provided is untrue and not given in good faith, a claim for breach of that duty can still be made. Employers should not therefore assume that remedies for failure to consult are limited to a financial penalty.