The decision in the remedies hearing in relation to the IBM Project Waltz case (the remedies judgment) was published on 20 February 2015, with Warren J deciding in favour of the scheme members.
IBM is expected to seek leave to appeal both the remedies judgment and last year’s judgment in IBM UK Holdings Ltd and another v Dalgleish and others  (the liability judgment).
A brief reminder of the issues in the liability judgment
In the liability judgment, the High Court held that when its actions between 2009 and 2011 were viewed as a whole, the Project Waltz changes amounted to a breach by IBM of both its Imperial duties and its implied contractual duty of trust and confidence.
The members’ reasonable expectations were relevant. A reasonable expectation was the members’ expectation of what would happen in future generated by the employer’s own past actions, and which gave members a positive reason to believe that the scheme benefit structure would not be changed again.
Despite the breaches, it did not necessarily follow that the Project Waltz changes were actually invalid, nor did the High Court say anything about how the employer was able to act in the future.
What were the decisions reached in the remedies judgment?
In the remedies judgment, Warren J considered each element of Project Waltz in the context of both theImperial duty of good faith and the implied contractual duty of trust and confidence. The conclusions he reached (in a bumper 187 page judgment) are summarised below:
- Non-pensionability agreements (NPAs) – the NPAs were signed by members and purported to make future salary increases non-pensionable. The Court held that the NPAs were unenforceable as they had been obtained in breach of contract. Members who had signed the NPAs were entitled to keep their salary increases and to have them treated as pensionable. In principle, these members could claim damages but this would be of little relevance to them, since their salary increases would now be considered pensionable and the majority of them would thus suffer no financial loss.
Those members who did not sign the NPAs, and therefore did not receive any salary increases, could not now claim the salary increases that were awarded to members who did sign the NPAs. Instead, such members would be entitled to damages to reflect:
- the salary increases they would have received, had IBM not implemented Project Waltz; and
- the loss of pension and other rights as a result of not having had such salary increases.
- Closure to future accrual – the exclusion notices, which sought to exclude active members from the IBM schemes with effect from 1 April 2011, were held to be voidable and capable of being set aside by members. The mechanism and timetable for members to give notice to the trustee that they wish to be treated as remaining in pensionable service from 6 April 2011 has yet to be determined by the Court.
The Court rejected IBM’s argument that the notices should be assumed to take effect at some point in the future, when reasonable expectations had lapsed. Warren J held that, in order to terminate members’ pensionable service, IBM would now need to issue new exclusion notices, which would have prospective effect only. In addition, injunctive relief would be granted to members if IBM issued such notices without conducting a further 60 day statutory consultation. Again, members would be entitled to damages.
- Early retirement policy – IBM had introduced a new, more stringent early retirement policy effective from 6 April 2010, which was designed to be cost neutral to the IBM schemes. Any retirement requests on terms that were more favourable than cost neutral would be considered “only in exceptional circumstances”. Warren J held that any member who, as a result of the new policy, had retired earlier than he otherwise would have, was entitled in principle to damages. IBM could not rely on the new policy in relation to members who would have enjoyed greater benefits under the old policy.
- Contractual duty of trust and confidence – members were found to be entitled to damages in respect of IBM’s breach of the implied contractual duty of trust and confidence which arose as a result of the way in which the consultation was conducted. However, Warren J concluded that it was doubtful this would give rise to any additional claim exceeding the other claims summarised above, as there was no additional loss.
The liability judgment was a clear warning that employers must take their Imperial duties of acting in good faith very seriously and must implement these by communicating honestly and openly with members when scheme changes are proposed. In addition, employers must ensure that any such exercises are conducted in a way that will not affect adversely the trust and confidence in the employer/employee relationship. The manner in which IBM carried out the consultation, and the notification to members of future pay rises only on terms of them being non-pensionable, was a breach of the good faith duty.
The remedies judgment is a favourable result for the members affected by Project Waltz, with Warren J finding that they are entitled in principle to a variety of substantial remedies. If leave is granted for an appeal, it will be interesting to learn the Court of Appeal’s view on the effect of members’ reasonable expectations on employers’ intentions to implement scheme changes.
Since the liability judgment, reasonable expectations have been considered in two further cases, neither of which is binding. In Thomson in July 2014, the Deputy Pensions Ombudsman (DPO) held that alleged statements by an employer in 2002 that it intended to continue granting discretionary annual increases to pensions in payment did not by themselves create a “reasonable expectation” among affected members in relation to the employer's duty of good faith. The DPO also held that the employer had not breached its implied Imperial duty of good faith, as the decision to end increases in 2010 was not irrational or perverse but, instead, was based on valid financial grounds as its schemes had significant funding deficits.
More recent is the Jamaica Privy Council’s (the PC) decision in UC Rusal Alumina Jamaica Limited and others v Miller and others (Jamaica) , published on 26 November 2014. The PC accepted that an employer’s position was qualified, including by a need to avoid exercising its powers in a way that was irrational, perverse, or arbitrary, in the context of its power to refuse consent to the trustees’ exercise of a discretion to make pension increases out of a scheme surplus during wind-up. The duty to avoid acting in such a way extended also to former employees as deferred members of the scheme, although the employer was entitled to act in its own interests, provided it had regard to the “reasonable expectations” of its scheme’s members.
The decisions in both the IBM cases will obviously raise concerns for any employers who have conducted such benefit changes in the past, as well as being a warning for those considering such exercises in future. This is the first instance of an employer being held to be in breach of its contractual and Imperial duties, although irrationality or perversity is required for such a breach. The case turned very much on its facts, together with some actions on the part of the employer which Warren J identified as ill-considered. Nevertheless, the actual nature of the scheme changes proposed was not, on its own, enough to breach the duty.
The determination in Thomson has been welcomed by employers as an indication that a reasonable expectation of future benefits can only be established with sound evidence of a past promise, and that this is not an easy hurdle for members to surmount. The DPO’s conclusion that there is no reasonable expectation of a discretionary increase was sensible. However, it remains the case that employers must consider consultations on pension scheme changes carefully. It is also essential that they allow themselves sufficient time to provide to members accurate and thorough advance communications of any intended changes.
We would not be surprised if IBM seeks leave to appeal in respect of both the remedies judgment and the liability judgment, as the sums involved are enormous and thought to run to tens of millions of pounds. Until such time as any appeal proceedings are resolved, there will be ongoing uncertainty for not only the affected IBM members, but also the wider pensions community and other employers contemplating scheme amendments. With the IBM decisions in mind, employers should ensure that they conduct open and honest consultations with members on intended scheme changes. Member communications should also be checked for “hostage to fortune” statements which could be interpreted as giving rise to reasonable expectations that certain benefit levels will continue.