If you are about to make changes to your pensions scheme you may want to pay particular attention to the recent case of IBM United Kingdom Holdings Ltd v Dalgleish and others. In IBM, the High Court held that an employer breached its duty of good faith in the way in which it implemented the restructuring of its defined benefit (DB) pension scheme.
The facts of the case are somewhat complex. By way of a broad brush highlight, IBM decided to make a range of changes to its DB schemes. Around 2004, IBM announced that member contribution rates would increase and pension scheme members were given the option to make part of their pay increases non-pensionable or move across to a defined contribution (DC) scheme for future benefits.
From 2009, IBM closed the DB schemes to future accrual of benefits, imposed new early retirement terms and withheld pay rises from members of the DB pension schemes who did not agree to the changes. This was known as “Project Waltz”. The matter was taken to court by the Trustees of the DB pension schemes for guidance.
The court held that the announcements made in 2004, created a “reasonable expectation” for the pension scheme members that the DB schemes would continue to be open to accrual and that IBM acted irrationally and perversely in subsequently closing the schemes in 2009. In particular, IBM was criticised for the short time period between the 2004 announcements, which were finalised in 2006 and the new changes announced in 2009.
Despite the fact that the consultation process was largely in accordance with statutory requirements, IBM was held to be in breach of its duty to act in good faith as it failed to take into account feedback from members. IBM also failed to disclose the real reason behind the closing of the DB schemes. It transpired that a key initiative for IBM’s changes was to improve its global position for accounting purposes and meet targets in America.
What does this mean for employers?
The case highlights that an employer owes a duty of good faith to the members of a pension scheme when exercising its functions. This is often referred to as the “imperial” duty of good faith (after Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd). If a reasonable expectation has been created then an employer will need to ensure that there are reasonable grounds for overriding that expectation.
An employer who is currently considering making pension scheme changes should ensure that it keeps an open mind during the consultation period and focusses on communicating effectively with pension scheme members and the pension scheme’s Trustees in order to manage their reasonable expectations in the future. It may also be prudent to consider whether any ‘reasonable expectations’ have been created in the past, which might impinge on the employer’s ability to introduce changes now.
That being said, it is important to note that this case is considered on its own facts. It does not necessarily follow that an employer will be in breach of its duty of good faith merely because it exercises changes to a DB scheme.
Whilst this is the current position, IBM has appealed the above High Court decision. Therefore, it remains to be seen whether the position will change.
If you are considering making pension scheme changes and/or wish to discuss this in more detail please contact your usual pensions contact at DWF.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.