The High Court’s decision in IBM v Dalgleish considered the duty of good faith owed by employers to their employees and pension scheme members. In the first liability judgment, the Court held that IBM breached this duty when attempting to make changes to its defined benefit pension schemes. A separate hearing was held on the question of how the breaches should be remedied and the second judgment is now available.
1. What was the remedies hearing about?
IBM operated two defined benefit schemes with a variety of benefit structures. It implemented a number of changes to these schemes during the period 2004 to 2011. The most notable changes were made between 2009 and 2011 under Project “Waltz” which introduced:
- Non-pensionability agreements (NPAs): signed by members and designed to make future salary increases non-pensionable
- Restrictive early retirement terms: intended to be cost neutral to the schemes
- Closure to future accrual of benefits: implemented by issuing notices to members excluding them from pensionable service.
In the first liability judgment Mr Justice Warren held:
- Project Waltz was inconsistent with the reasonable expectations of members;
- BM acted in breach of its Imperial duty of good faith to the members of its schemes in closing these schemes to future accrual and imposing a new restrictive early retirement policy so soon after the earlier changes;
- IBM provided misleading information to members during the consultation process which preceded the closure.
A further hearing was required on how the above breaches should be remedied.
2. What arguments were made by the parties?
The members argued that the breach of IBM’s Imperial duty rendered the Project Waltz changes ineffective.
IBM argued that the Project Waltz changes were still binding and had been validly implemented in accordance with the schemes’ governing documentation. In order to try to address the wider Imperial breach, IBM submitted that the exclusion notices should be held to take effect from a future date when reasonable expectations had elapsed.
3. What did Mr Justice Warren decide regarding remedies, and what was his reasoning?
Mr Justice Warren held in favour of the members:
The NPAs did introduce an express term of “non-pensionability” into each salary increase granted by IBM, but the non-pensionability term was unenforceable. IBM obtained the NPAs in breach of contract and no court of equity would grant injunctive relief to IBM if it sought to prevent members from claiming pension benefits based on pensionable salary increases.
In principle, the members were entitled to damages as a result of signing the NPAs, although they would suffer no loss if all their salary increases were made pensionable.
(b) Early retirement policy
IBM could not rely on the new, more restrictive policy. Any member who, as a result of the new policy, had retired earlier than he otherwise would have, was entitled to damages.
(c) Closure to future accrual of benefits
The exclusion notices which IBM issued to members in an attempt to exclude active members from pensionable service, were voidable and liable to be set aside at the election of each member.
The Court rejected IBM’s argument that the notices should be held to take effect from a future date when reasonable expectations had elapsed.
If IBM wished to terminate pensionable service, it would need to serve new exclusion notices with prospective effect. In addition, IBM must repeat consultation and the Court would grant injunctive relief in relation to the service of new exclusion notices unless IBM gave a binding commitment to the trustees and members and/or an undertaking to the Court, that it would not service such notices without conducting a proper consultation.
The members were also entitled to damages.
(d) Contractual duty of trust and confidence
Members were entitled to damages in respect of the breach of the contractual duty of trust and confidence that arose as a result of the manner in which IBM conducted the statutory consultation process.
Although the Court commented that it was unlikely this would give rise to any additional claim exceeding the other claims before the Court since there was no additional loss.