The long-awaited remedies judgment in the case of IBM v Dalgleish was handed down on Friday, 20 February. Considerably shorter than the liability judgment of April last year, the remedies judgment is nevertheless, in Warren J's own concluding remarks, a "mammoth undertaking". It covers the remedies potentially available to members of IBM's pension plans who were affected by the "Project Waltz" changes but also the basis on which the trustees should administer the plans. The judgment also considers the procedures which IBM would need to follow if it sought to close the scheme to future accrual in the future.
In April 2014, Warren J handed down his controversial judgment in the case of IBM v Dalgleish , in which he held IBM UK Holdings Limited ("Holdings"), the principal employer of two IBM defined benefit pension plans, to be in breach of its duty of good faith to members of those plans.
The Court held that a package of changes to the DB sections of the IBM Pension Plans (know internally within IBM as Project Waltz), which included closing the Plans to future accrual and freezing increases to pensionable pay, "confounded" the "reasonable expectations" of members that their benefit accrual in the Plans would continue into the future, except where there was a change in financial economic circumstances of the business. A new less favourable early retirement policy was also introduced. These reasonable expectations, Warren J found, had been created by communications made by IBM to members directly and via the Plan trustees during the course of two previous successive changes made to members' pension arrangements. The Court also found that IBM had breached its good faith duty to employees over the way in which it had consulted with the employees in relation to the proposed changes to their pension arrangements.
The Project Waltz changes for which Holdings was held to be in breach of its duty of good faith were:
- Closing the DB sections of the IBM Pension Plan (the Main Plan) (apart from in relation to certain chosen employees) and the IBM IT solutions Pension Scheme (the I Plan) from 6 April 2011.
- The Non Pensionability agreements, under which DB members were offered changes to their contractual terms by which future pay increases would not be pensionable. Any member who did not agree to the change would receive no salary increases in future. Following opposition from members, this proposal was modified so that any dissenting member would receive no salary increases only during the period 2009 to 2011, after which the position would be reviewed.
- An "early-retirement window" was opened in November and December 2009 under which active defined benefit members in the Main Plan could apply to take early retirement with IBM's consent. If consent was granted, these members would be able to take early retirement on the favourable terms that had applied until then. A new early retirement policy was then introduced from 6 April 2010 under which IBM would only grant early retirement on "cost neutral" terms.
- M Plan membership (part of the Main Plan) would be made available to former active members of the DB Plans from 6 April 2011.
Warren J held that the Waltz changes as a whole were so severe so as to amount to a perverse and irrational conduct resulting in a breach by IBM of its Imperial duty and its contractual duty of trust and confidence. For our briefing on the main judgment, click here
The Non Pensionability Agreements (NPAs)
Warren J held that:
- The non-pensionability term under the NPAs is not enforceable by IBM against members.
- Members who signed the NPAs and received salary increases can keep them for the past and are entitled to them for the future. The increase are also pensionable. Fact that the NPAs were invalid does not meant that the salary increase which IBM gave to members were invalid. The non-pensionability term, because it was a breach of the employer's good faith duty, could be severed from the rest of the varied contracts of employment, leaving the salary increases intact. IBM Holdings argued that it would not have offered the increases other than on terms as to their non-pensionability. However, Warren J found that whilst that may be the case, the real consideration for the salary increase was the provision of labour and services by IBM employees, and not whether they signed the NPAs.
These employees are entitled to claim damages - (although it is difficult to see if these employees have received increases which are pensionable, what their loss might be).
- The effect of the NPAs on members is to be considered on a member-by-member basis.
- Members who did not sign the NPAs, however, are not entitled to any salary increases, pensionable or otherwise. They are, however entitled to damages:
“members who did not enter into the 2009 NPAs are entitled to damages to reflect the salary they would have received in the ordinary course of events, but for Project Waltz, and the loss of pension and other rights as a result of those salary increases not having been granted.”
The most obvious way to put the members into the position which they would have been is to provide them with actual salary increases (with retrospective effect) equal to those which they would have received – Warren J. was however, sceptical as to whether Holdings members would ever be able to agree such a figure.
- To the extent that some members, as the trustees had argued, had left employment "in response" to the NPAs, Warren J. held that a member would be able to obtain damages against Holdings for "breach of contract" if the breach amounted to a repudiatory breach justifying the member in treating the contract of employment to be at an end and the member was able to show loss (taking into account usual issues such as the taking of alternative employment and 'causation'.)
- The trustee should administer the DB plans on the footing that salary increases awarded following the 2009 NPAs are pensionable, but only under the terms of the earlier 2006 NPAs (which were valid), under which only two thirds of salary increases would be pensionable. The trustee is not to be concerned in administering the plans with salary increases which members who did not enter into the 2009 NPAs would or might have received if Holdings had not acted in breach of duty.
Purported closure of the DB Plans to future accrual
Warren J. agreed with IBM Holdings that the exclusion notices ("the Exclusion Notices") through which IBM had sought to close the DB section of the Main Plan were voidable i.e. liable to be set aside but not, as the trustees tried to argue, void. He agreed with Holdings argument that the Supreme Court had confirmed in Pitt v Holt that an exercise by trustee of a dispositive power in a manner that constituted a breach of trust/fiduciary duty is voidable rather void, adding:
"It would be extremely odd and illogical if it were the case that an exercise by an employer of a power conferred upon it under an occupational pension scheme in a manner that breached the non-fiduciary Imperial duty was void rather than voidable".
If the Exclusion Notices were voidable, the trustee's position was that this was at the election of individual affected members rather than to be avoided by the Court in relation to all or a group of affected members. Holdings did not argue for a different conclusion. Warren J held that where the Exclusion Notices are set aside in respect of members, such members are to be treated as having continued in pensionable service under the DB plans after 6 April 2011.
Alternatively, members could treat themselves as continuing to be the members of the DC arrangement on the basis on which that arrangement was offered.
Closing the DB Plans to future accrual at some date in the future
Warren J refused to grant an alternative date for the Exclusion Notices already served beyond the longstop date on which "reasonable expectation" ceased (the date being 31 March 2014) ("the Longstop Date"). The Exclusion Notices are to be avoided in their entirety. If Holdings wished to terminate pensionable service in the future (i.e. with effect from on or after the Exclusion Date), it will have to issue fresh exclusion notices
As to whether further consultation would be necessary under the Employer Consultation Regulations, if the scheme were to be closed at a future date, Warren J. held that Holdings must consult afresh. The previous consultation would not hold, as it was in breach of the implied contractual term of trust and confidence; moreover, the consultation would be with respect to closure from another date as opposed to the previous one of 6 April 2011.
Members were entitled to claim damages against IBM for breaching its implied contractual duty of trust and confidence to the members for the way in which it had conducted the consultation exercise in relation to the Project Waltz changes.
The early retirement window
Warren J held that in principal, members who retired pursuant to the early retirement window were entitled to damages for breach of contract, or equitable compensation as a result of Holdings' breach of its imperial duty. To the extent that a claim for damages is made, there would be significant issues around causation, remoteness and mitigation (and similar issues may also arise in relation to equitable compensation). These issues would be best dealt with in proceedings (which Warren J said would include mediation) between Holdings and the affected members.
The new early retirement policy
Any member who left service on unfavourable cost neutral early retirement terms under the new early retirement policy should be entitled to benefit as if he had left service on the earlier favourable terms. Holding's consent would ordinarily have been required in relation to the favourable early retirement terms. The refusal (or deemed refusal) of consent by Holdings to favourable early retirement terms was a breach for Holdings of its Imperial duty and its contractual duty of trust and confidence. The trustees should therefore proceed on the basis that either consent was not required or that it is to be treated as having been given.
A member may, however, elect to retain benefits as if the old early retirement policy did not apply to him.
The liabilities judgment emphasised the need for caution when proposing scheme changes and communicating them to members and trustees, as these could be relied on to challenge further changes to members' benefits in the future.
The remedies judgment entitles members to choose between scenarios for remedy purposes i.e. for DB members to elect to continue in pensionable service or treat themselves as members of the DC section. Some aspects of the judgment seem especially harsh as against IBM such as allowing members who had signed the NPAs to keep the salary increases despite IBM stating that it would not have granted the increases without terms as to their non-pensionability.
No monetary award is made against IBM. It is up to members to bring the claims. The liability for IBM could be considerable if claims are successfully made.
If an appeal is made (as seems likely – Warren J highlights a number of points which he considers may be appealed) – it may be that some or all of the member claims are held in abeyance pending the outcome of the appeal.
IBM v Dalgleish  EWHC 389 (Ch) (Bailii)