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 duty of good faith.

The DPO distinguished the facts in the recent IBM case and dismissed a complaint by Mr Thomson (the Complainant), 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 the Complainant. 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 IBM decision

In our April 2014 update, we reported in depth on the decision in the IBM case where the High Court held that the employer was in breach of its contractual and Imperial duties in the way in which pension scheme changes were implemented.

In brief, the claimant members sought to clarify the validity and lawfulness of changes purportedly made by IBM to its two schemes, known internally as “Project Waltz”. IBM sought to close the schemes to future accrual, to make future pay rises non-pensionable and to introduce a new early retirement policy under which, broadly, no enhanced benefit packages would be agreed.

The members’ major complaint was that IBM was in breach of the implied contractual duty of good faith which is owed by an employer to pension scheme members when exercising its functions in relation to the scheme. The implied duty of good faith is often known as the Imperial duty after the 1991 case in which it was first identified. 

IBM had previously implemented two benefit change exercises, in 2004/05 and 2005/06. Although when these changes were made IBM had not said there would never be any further scheme amendments, the Court found that the employer's past statements and actions gave rise to the members’ reasonable expectations that no further benefit changes would be implemented.

There was also a question of whether IBM had breached its duty of mutual trust and confidence which is implied into an employment contract and which should exist between an employee and employer.

The 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 detailed judgment examined at length the employer’s duty of good faith in the context of both employment and pensions law. Warren J stated that:

“The duty to maintain trust and confidence applies to the exercise of powers under a pension scheme in the same way as it applies to any other conduct by an employer.”

However, this was not to say that the content of the duty in the pensions and employment contexts was the same. It was not possible to “blindly apply employment law principles or cases” and the strand of employment law suggesting fairness was the governing feature, said Warren J, should be rejected.

The judge also considered that the members’ reasonable expectations had been relevant. A reasonable expectation was the members’ expectation of what would happen in future generated by the employer’s own past actions in 2004/05 and 2005/06, and which gave members a positive reason to believe that the scheme benefit structure would not be changed again.

Despite this, the Court also held that although IBM had acted in breach of its duties, it did not necessarily follow that the Project Waltz changes were actually invalid, nor did the Court say anything about how the employer was able to act in the future. (A remedies hearing took place in August 2014 and a decision on that is awaited).

The IBM judgment obviously raised concerns for any employers considering making significant changes to the benefit provisions under their pension schemes, as it was the first time that an employer has been held to be in breach of its contractual and Imperial duties. However, the IBM case did confirm that irrationality or perversity is required in order to breach those duties, and that the case turned very much on its facts, together with some actions on the part of the employer which the court identified as ill-considered. Nevertheless, the actual nature of the scheme changes proposed under Project Waltz was not, on its own, enough to breach the duty.

The facts in the Thomson case

The Complainant was employed by GEH Holdings, (the Company), and was a pensioner member and former trustee of the GE Pension Plan (the Plan), as well as a “top-up” arrangement, the GE Supplementary Pension Scheme (the Scheme). The Company was the principal employer for both schemes and GE Pension Trustees Ltd (the Trustee) was their trustee.

The Plan rules provided that “[i]f the Principal Employer so agrees, the Trustee may make increases to all or some of the pensions [in payment attributable to pensionable service before 5 April 1997]", and that increases "must be reviewed by the principal employer at least once a year”. The Scheme rules contained similar provisions on increases to pensions in payment, except that they stated that “[i]f the Trustees so agree, the Principal Employer may make increases to all or some of the pensions ...”.

Between 1988 and 2009 inflation-related increases on pre-1997 service were given each year by both the Plan and the Scheme. But from 2010 no such increases were made, leading to complaints to the Pensions Ombudsman's office by a number of members, including the Complainant. The Company later submitted that with the Plan and the Scheme both in significant deficit, it could no longer justify the provision of discretionary benefits.

The Complainant's principal claims were that:

  • following the IBM  judgment, the past practice and custom up to 2010 of making yearly increases, together with Company assurances at member meetings in 2002, created a reasonable expectation among members that this would continue;
  • the Company’s failure to balance its assurances to provide increases and the members’ reasonable expectations of such increases against its business needs amounted to a breach of the implied contractual term of mutual trust and confidence; and
  • the Company’s “blanket decision” not to award increases in 2010 without prior negotiation with the Trustee broke the annual review requirement in the rules. The Company had also sent an email to the Trustee informing it that the Company did not agree to a discretionary increase in 2010. The Trustee had failed to exercise its discretion before the Company’s “pre-emptive” email. Together, these actions amounted to a “failure of process” and “capricious” actions by the Company in breach of its Imperial  duties of good faith and a breach of trust by the Trustee.

The DPO's determination

The DPO dismissed the Complainant's complaint for the following reasons:

  • the IBM decision did not support the Complainant's claim that past practice was sufficient to give rise to reasonable expectations that a benefit would continue to be granted. The fact that the increases had been awarded in the past could not give rise to future expectations, particularly as the past increases were discretionary and no existing right had been curtailed or limited;
  • the Complainant had not provided sufficient evidence that the Company had given assurances during the meetings in 2002. In IBM, the judge stated that “a statement of intention…cannot be treated as a commitment, promise or guarantee” and DPO said that there would need to be more than a statement of intention to give rise to a reasonable expectation. The facts put forward by the Complainant did not suggest this had been the case in any event - the Company had no record of the relevant meetings nor of having given such assurances. The DPO noted that eight years had passed between the alleged statement in 2002 and the ending of increases in 2010, and no statement could be expected to apply indefinitely. There was, therefore, no breach of the implied contractual term of mutual trust and confidence;
  • on the question of capriciousness, the DPO noted that the test adopted in Imperial  was a test of irrationality or perversity (of which capriciousness was part). There was no “blanket decision” not to award increases. In addition, the Company’s email to the Trustee was neither irrational nor perverse, as the Company had provided valid financial reasons why it would not fund the increases.

The DPO also found that there was no “failure of process”. Although the mechanics of the Scheme rules required the Trustee to agree increases before the Company, the Plan rules provided for the reverse order. There was “no functional significance” whether the Company gave its opinion before or after the Trustee considered the matter. The Company and the Trustee were responsible for both arrangements and it would be “a nonsense to enter into two separate administrative processes”. The Company had not breached its Imperial duties in this regard, nor had the Trustee committed a breach of trust.


The IBM  judgment was a clear warning that employers must take very seriously their Imperial duties of acting in good faith and must implement these by communicating honestly and openly with members when scheme changes are proposed. In addition, they 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. In IBM, the manner in which the consultation was carried out, and the implication that members who did not agree to future salary increases being non-pensionable might not get any pay rises at all, was a breach of the good faith duty. It is still possible that IBM may be appealed, depending on the awaited outcome of the remedies hearing.

Following the IBM decision, there was speculation that there would be an appreciable increase in claims from members citing “reasonable expectations” as a means of challenging employers’ changes to pension scheme benefits. Although the DPO’s determination is not binding on anyone other than the parties, the Thomsondecision is interesting, as it is the first case to challenge an employer’s attempt to change scheme benefits post-IBM.

The DPO in Thomson determined that past practice alone is insufficient to establish a reasonable expectation that a particular discretionary benefit will continue. However, Warren J in IBM stated that a reasonable expectation (here, in relation to early retirement) was the result of a policy and a practice, although he subsequently gave examples of different situations which seemed to imply that a breach of the Imperial duty will depend on the circumstances of the proposed changes and the members to which they may apply. It should be remembered, however, that IBM’s actions in relation to changing scheme benefits were considered by the Court not to have been carried out in an open and transparent way, neither did the employer, in the Court’s judgment, inform the trustee or the members of its true intentions for making the pension changes – to satisfy its earnings per share requirements. This was important in the Court’s finding that the employer had acted irrationally and perversely, which was necessary to establish a breach of the Imperial duty.

However, in some ways, Warren J’s view that the content of the contractual and Imperial duties of good faith could differ from one another, could be seen as surprising. In practice, any difference between the two tests is likely to be of limited importance given that neither test is precise. Indeed, at one point, Warren J’s judgment also comments that “…there may…be no significant difference in the two different tests to a particular set of closely related facts” and his discussion of the contractual duty of good faith could be interpreted as inconsistent with previous employment case law on this duty. This may not, therefore, be the last word on the formulation of the duty of good faith as two different duties.

In IBM, the Court also held that “a statement of intention, if that is all that is established, cannot be treated as a commitment, promise or guarantee.” In Thomson, the complainant was unable to establish that the 2002 meetings had ever taken place, which ultimately made it impossible to conclude whether purported statements at those meetings amounted to a promise or merely a statement of intent.

It should be remembered that determinations of the Ombudsman are binding only on the parties involved and are not precedents for future cases. The DPO decided in Thomson that there was no “failure of process” where the Company and the Trustee did not follow the mechanics set out in the Scheme rules because those same persons were responsible for taking decisions in relation to the Plan, albeit in the reverse order. There was “no functional significance” in the approach the Company and the Trustee had taken. In our view though, this part of the DPO’s determination is very fact specific and is dependent on the two schemes being administered together. We think that if there had been only one scheme, it is unlikely that the DPO would have found immaterial the order in which the Trustee’s and Company’s actions were taken. We would advise other trustees and employers to take care to follow their own scheme’s provisions exactly.

The determination in Thomson will be welcomed by employers as an indication that a reasonable expectation of future benefits can be established only with sound evidence of a past promise, and that this is not an easy for hurdle for members to surmount. 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 to members accurate and thorough advance communications of any intended changes.