In April 2014, the High Court, in IBM UK v Dalgleish & others, found that an employer had breached its duties in the way it went about making certain benefit changes including closing its DB schemes to the future accrual of benefits. The next instalment in this case occurred in March this year when the High Court gave its very lengthy remedies judgment on what the appropriate remedies should be for the various breaches. Overall, the decision is good news for members. It requires the employer effectively to undo the majority of the benefit changes. This speedbrief looks at the remedies judgment and its implications.
The April 2014 liability judgment determined that IBM had breached its implied duty of good faith and contractual duty of trust and confidence in the way it implemented benefit changes known as “Project Waltz”. Project Waltz included the following changes:
- closing the DB schemes to future accrual by serving exclusion notices;
- withholding future pay increases from members who did not agree to salary increases being non-pensionable; and
- terminating the existing, generous early retirement policy in favour of a more restrictive policy.
Project Waltz was the third in a series of benefit change exercises undertaken by IBM since 2004. The High Court held that the communications issued during the earlier projects had entitled members to hold “reasonable expectations” that DB accrual would continue. For more background, please see our previous speedbrief.
Closure of DB schemes
In the liability judgment, Warren J found that the exclusion notices used to close the DB section to active members were a breach of IBM’s employer duties. In the remedies case, IBM argued that the exclusion notices should therefore take effect from the date at which members’ reasonable expectations as to the future of DB accrual expired i.e. members could be treated as having left the DB schemes after that date. Warren J disagreed and found in favour of the trustees: the power to close the DB schemes had been used on a particular date and could not simply be rolled forward to a future date. Warren J found that the exclusion notices were voidable at each affected member’s individual election. Members who choose to declare the notices void will be treated as having remained in the DB schemes and be entitled to back-dated DB benefit accrual. Assuming members take up this option, this means that in order to close the DB schemes, IBM will need to run the closure exercise afresh, including a new member consultation.
The timetable and means by which members may exercise this right has yet to be decided; Warren J noted that he was prepared to grant injunctive relief if the parties were unable to agree a way of preserving their interests pending an appeal. It is unclear how this will work in practice.
Warren J reviewed some of his findings from the liability judgment with respect to the non-pensionability agreements (the NPAs). The three NPAs, issued between 2009 and 2011, were each found to be a breach of the employer duties and, in addition, Warren J found that, when taken together, the NPAs formed an overall strategy which disappointed members’ reasonable expectations that salary increases would continue to be pensionable. Interestingly, Warren’s view was that “no reasonable employer would make a blanket decision refusing for all time not to grant any pay increase unless the member concerned entered into an NPA”. This is a point worth employers bearing in mind when implementing similar pensionable pay caps.
The NPAs were deemed unenforceable. Members who signed the NPAs are entitled to keep any salary increases they received and have them treated as pensionable. Members who did not agree to the NPAs, and therefore did not receive subsequent salary increases, are not entitled to those historic increases (and the court could not compel IBM to award salary increases) but can claim for damages to reflect the salary they would have received if the Project Waltz changes had not been made. Warren J noted that it would be unrealistic to expect the parties to agree what the figure should be.
Early retirement policy
Historically IBM had operated a generous early retirement policy. Project Waltz introduced a new, more stringent early retirement policy including a short window of opportunity for members to retire under the old policy.
Warren J found that the members had reasonable expectations that the old retirement policy would continue until at least 31 March 2014, and therefore the implementation of the new policy from April 2010 was a breach of the employer duties. In addition, the time given to members to retire early under the old policy was found to be too short, and effectively forced members to retire immediately. IBM was therefore not able to rely on the new early retirement policy and the old policy is effectively still in place.
Members who took up the offer to retire under the old policy are able to claim damages if they can show that they would not otherwise have retired at that time. Members who retired under the new, less generous policy are entitled to a readjustment to provide such benefits as would have been payable under the old policy. Members who could show that they did not retire early because of the new policy are also entitled to damages, provided they can show that they would have retired under the old policy.
The remedies judgment requires IBM effectively to undo the majority of the Project Waltz changes. The practical implications and cost consequences of this decision are as yet unclear, but will certainly be significant.
The case serves as a warning to employers who have conducted similar exercises in the past and also to those who intend to do so in the future. However, this is a very complex set of circumstances and the decision turns on its specific facts.
Lessons learned include the following:
- consider members’ reasonable expectations in light of previous member communications, scheme restructurings etc;
- to the extent that members’ reasonable expectations may be confounded, balance these against the business case for change;
- consult with members in an open and honest way in compliance with the spirit as well as the letter of the legislation;
- ensure that change is conducted in a way that does not damage the trust and confidence of the employer/employee relationship; and
- be mindful that the sanctions for failing to act in accordance with the employer duties of good faith/trust and confidence can be severe and, as in this case, negate the effect of the changes.
IBM is expected to seek leave to appeal both the liability and the remedies judgment, so the complicated legal dance of Project Waltz may have futher twists and turns.