The Deputy Pensions Ombudsman (DPO) has held that alleged statements by an employer in 2002 that it intended to continue granting discretionary yearly increases to pensions in payment did not by themselves create a “reasonable expectation” among affected members in relation to the employer's contractual duty of good faith.
The DPO distinguished the facts in the recent IBM case and dismissed a complaint by Mr Thomson (T), a pensioner member of the GE Pension Plan, who had received yearly discretionary increases every year up to 2009. The DPO held that the employer's previous conduct and alleged statements of intention did not create a reasonable expectation that could be frustrated by its decision to end discretionary increases in 2010. There was therefore no breach by the employer of the implied contractual term of mutual trust and confidence.
The DPO also held that the employer had not breached its implied obligation of good faith (its Imperial duty), as submitted by T. There had been no “failure of process” and its 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.
The determination in Thomson will be 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 easy for members to establish. The DPO’s conclusion that there is no reasonable expectation of a discretionary increase is 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 members with accurate and thorough advance communications of any intended changes.