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          Have you created 'reasonable expectations' for your scheme members?

          Date: 19/10/2014

          The Pensions Ombudsman has recently heard a case in which a member attempted to rely on the recently decided IBM case. The member sought to establish that a reasonable expectation had been created in relation to granting discretionary increases to pensions in payment, and that as such they should continue to be awarded.

          The complaint was dismissed because the only real information that the member had based their reasonable expectation on, at least as far as they have provided evidence for, was past conduct. This was not sufficient to show that a reasonable expectation had been established amongst the members that increases would always be awarded.

          The IBM case

          The IBM case concerned a series of changes to a pension scheme, and in particular “Project Waltz” which was the third major raft of reforms. Amongst other things, the changes involved closing the scheme to future accrual.  During previous reforms, extensive communication was issued to members explaining the changes, but these communications also included a statement that there were no further changes on the horizon.  The case confirmed that, in the absence of any major shift in the fortunes of the company sponsoring the scheme, these communications had led to a reasonable expectation amongst members that the scheme would remain open to accrual.

          The case explored the duty of good faith or Imperial duty that the employer owed to its employees as part of the employment relationship. It highlighted that reasonable expectations of scheme members may, on the facts, be critical to assessment of whether an employer has acted in breach of this duty.

          It is important for both employers and trustees to bear in mind the outcome of the IBM case in considering and implementing any changes to defined benefit schemes.

          Practical points for employers:

          • There must be a sound business case for the change to the scheme.

          • The business case should be conveyed openly and honestly to employees, members and trustees and relevant information should not be withheld.

          • Consider if previous communications are likely to have created any reasonable expectations and assess what these expectations may be.

          • Ensure statutory consultation requirements are complied with (in the IBM case it was found that they were not).

          Practical points for trustees:

          • Consider any proposal against historical changes and context, not just the employer’s current rationale and business case for the current change.

          • Ensure that the employer uses the powers they have under the scheme for their proper purpose. If reasonable expectations may have been caused by the actions of the employer, it may be necessary for the trustees to test this in court before agreeing to any change.

          Author: Maureen Burns