Key points

  • Two very recent Court of Appeal decisions on the employer’s duty of trust and confidence will be reassuring to employers who have made, or are considering making, changes to future pension scheme benefits to manage their scheme liabilities. In particular, the High Court’s high-profile IBM decision, which raised the prospect of the duty being breached in a wide range of scenarios involving changes to pension scheme benefits, has been overturned.
  • The Court of Appeal has clarified that when assessing whether employers have breached their duty of trust and confidence in relation to their powers under a pension scheme (the “Imperial Duty”), courts should look at whether an employer considered all relevant matters and disregarded irrelevant matters. Employers should therefore keep records of their decision making process.
  • The courts will also consider whether the decision is one which no other rational (rather than reasonable) employer could have reached.
  • A separate (but linked) duty of trust and confidence applies under the employment contract – this can potentially be different from the pensions Imperial duty and catches acts which are considered by the courts to be arbitrary or capricious.
  • Employers could face reputational issues (as well as the cost of damages) if they are unable to successfully defend a claim for breach of the duty of trust and confidence, particularly in a time when defined benefit pension schemes are under Government scrutiny.

Introduction

Two recent Court of Appeal decisions on the employer’s duty of trust and confidence will be reassuring to employers who have made, or are considering making, changes to pension schemes to manage their scheme liabilities. The courts have long implied an obligation on employers not to act in a way that breaches an implied mutual duty of trust and confidence when dealing with pensions matters, as well as other aspects of the employment relationship. In relation to discretions under pension schemes, this is called the “Imperial Duty” after the Imperial Tobacco case of 1991 which established the existence of the pensions duty in relation to discretions (whether held by an employer or by a non-employer, eg a principal company or principal employer). The limits of the Imperial Duty have been unclear following a number of cases from 2011 onwards but the decisions in IBM v Dalgleish and Bradbury v BBC provide some clarity to employers on the test that courts will apply to determine whether the Imperial Duty has been breached. 

IBM v Dalgleish

In IBM v Dalgleish, the Court of Appeal overturned the High Court’s decision, and upheld IBM’s appeal, by deciding that neither of the two IBM companies (the actual employer of scheme members and the principal employer) had breached their Imperial Duty (nor had the actual employer of scheme members breached its contractual duty of trust and confidence) when the two IBM companies decided to implement a number of changes to the IBM defined benefit pension schemes, including terminating future accrual and capping pensionable salary. In the High Court, the first instance judge, Warren J, held that certain statements made by IBM a few years prior to the closure gave rise to “reasonable expectations” (contrasted with ‘mere expectations’) that the pension scheme would not be terminated, save for a substantial reason (for further details about the High Court decisions in the IBM, see our briefing “The Imperial Duty of trust and confidence and pension benefits: the IBM case”). Although Warren J acknowledged that IBM’s decision to terminate accrual was a rational commercial decision, he found that IBM failed to show that it had no other way of achieving its legitimate business aims which would be compatible with the “reasonable expectations” of the employees, and therefore held that IBM was in breach of its Imperial Duty.

The Court of Appeal overturned the High Court decision on the basis that Warren J had applied the wrong test to determine whether there had been a breach of the duty. The Court of Appeal held, that for cases which involve the exercise of an employer’s discretionary power, the correct test to be applied by a court is a rationality test equivalent to the “Wednesbury” test which applies to public authorities. This means looking at whether (a) the employer took all relevant matters into account, and disregarded irrelevant matters, and (b) whether the decision is one which no rational (rather than reasonable) employer could have reached. The Court of Appeal also said that while employees’ reasonable expectations were a relevant factor, Warren J had wrongly elevated their importance over other relevant factors and given them an “overriding significance”.

In making this ruling, the Court has brought the Imperial duty much more into line with the 2015 Braganza decision of the Supreme Court, which applied the Wednesbury test to a review of a factual decision by an employer under a pension arrangement. The Court said this approach is required because a court does not, and must not, substitute its own decision for that of the employer. We understand that the members will not be appealing the Court of Appeal's decision in this case.

Bradbury v BBC

A week or so before the IBM decision was handed down, in Bradbury v BBC, a differently constituted Court of Appeal also considered the scope of the Imperial duty and the duty of trust and confidence when looking at whether the BBC had breached its Imperial duty when it sought to make changes to the BBC pension scheme.

In order to reduce a significant deficit, the BBC asked pension scheme members to agree to limit the extent to which future salary increases would be pensionable. The Court of Appeal held that the BBC had the power under the scheme rules to determine that not all pay would be pensionable and upheld the first instance decision, which was also by Warren J, and found that the changes did not breach either the Imperial duty or the implied contractual duty of mutual trust and confidence. The decisions by the BBC were not discriminatory or for an improper motive and needed to be assessed against the reality of the background that the deficit in the BBC pension scheme was so substantial that, absent reform, the increase in employer contributions that it would have had to meet would have been unaffordable to the BBC. The increase in contributions would have been equivalent to an increase from 3.5% of the licence fee to around 10% of the licence fee. The court concluded that this would have affected its ability to maintain the quality and range of services it provides to licence fee payers. 

Summary

These decisions are helpful to employers who have made, or are considering making changes, to pension schemes as it clarifies the test that the courts will apply to determine whether an employer breached its Imperial duty or the implied duty of trust and confidence.

Many employers consider making changes to pension schemes as a result of increasing pension scheme liabilities in a challenging economic climate. The existence of the duty does continue to place the onus on employers to ensure that decisions affecting their employees are properly reasoned and justified and to take all relevant considerations into account. Employers could still face reputational issues (as well as the cost of damages) if they are unable to successfully defend a claim for breach of the duty of trust and confidence, particularly in a time when defined benefit pension schemes are under increased political scrutiny. Employers who can show that they considered all relevant factors, including any statements previously made in communications to employees and scheme members, and that they disregarded irrelevant factors will be in a good position to defend any subsequent claims.

Employers who want to make changes to their pension schemes should take care when conducting consultation exercises as they could be liable for damages if they are found to have failed to carry out a proper consulation exercise in accordance with pensions legislation. In IBM v Dalgleish, the Court of Appeal did not dispute the High Court's determination that IBM was in breach of its contractual duty of good faith because it did not carry out a proper consultation in relation to the changes to the pension schemes.

For further details about the initial High Court decisions in IBM and Bradbury, see our briefing “The Imperial Duty of trust and confidence and pension benefits: the IBM case”.