IBM UK Holdings and another v Dalgleish

The Court of Appeal has overturned the High Court decision that found an employer's ability to introduce otherwise rational changes to its pension scheme was restrained due to "reasonable expectations engendered by the employer". The Court of Appeal found that although reasonable expectations may be legitimate matters to be taken into account by an employer, they "do not have special legal status" and before any expectations can be taken into account, they must meet minimum standards of clarity and certainty, ideally "equivalent to what is required for a contract or an estoppel".

In response to the financial crisis of 2008/09 IBM introduced a number of changes to its defined benefit pension plans during 2009 and 2010. The changes that were the subject matter of these proceedings were:

  1. Cessation of DB accrual.
  2. Further restrictions on the pensionability of salary increases to essentially "freeze" final pensionable earnings for the majority of DB members.
  3. Introduction of a more restrictive early retirement policy.

In 2014 Warren J in the High Court held that IBM took reasoned business decisions in the context of the 2008 financial crisis, but previous employee communications from 2004 and 2006 had entitled members to hold “reasonable expectations” that restrained IBM's ability to exercise its discretion to make the changes listed above.

The High Court found that in disappointing these “reasonable expectations” IBM acted in breach of their so-called Imperial duty of good faith and in breach of the employer's duty of trust and confidence. IBM was granted leave to appeal the decision and the Representative Beneficiaries cross-appealed one finite point.

The High Court also found that IBM was in breach of the employer's duty of trust and confidence and the statutory requirement to consult as a result of the manner in which they consulted on the changes: IBM did not appeal this finding.

The decision was ground-breaking because the concept of "reasonable expectations" restraining an otherwise entirely rational decision by an employer to exercise a non-fiduciary power under a pension scheme was novel. The decision caused a number of employers to worry about whether their own closure exercises and non-pensionability of salary increase agreements were valid and potentially open to challenge from employees. The decision also introduced doubt as to the scope of the so called Imperial duty of good faith and potentially placed employers in difficulties when communicating with its employees.

The Court of Appeal's judgment was handed down today: IBM's appeal was allowed and the cross appeal was dismissed.

The headline findings were as follows:

  • Warren J was wrong to decide that an exercise of an employer's non-fiduciary discretion must be justified as a necessary and appropriate response to the circumstances. Instead it was only open to the High Court to overturn IBM's decision by finding that no reasonable, rational employer (in the Wednesbury sense) would have made those decisions
  • Warren J was wrong to hold that the "reasonable expectations" he identified in respect of future DB accrual had been generated on the facts – the statements given in relation to previous pension changes did not by themselves give rise to a "reasonable expectation", and "there was no adequate basis of fact or reasoning for his [Warren J's] decision that such Reasonable Expectations had survived until 2011, still less until 2014"
  • There also was no adequate basis for the finding that a "reasonable expectation" as to the continuance of the generous early retirement policy existed
  • Importantly, if "reasonable expectations" are to be legally relevant they "would have to meet minimum criteria of clarity, certainty and assumption of responsibility, which should be akin to those required for contract or estoppel"
  • Insofar as Warren J found that the non pensionability of salary increase agreements were procured in breach of IBM's duty because of a "threat" (that members had no "real" option if they ever wished to receive a pay increase), or because they formed part of the wider changes, he was wrong. There were also no "reasonable expectations" established which were disappointed by the introduction of the non pensionability of salary increase agreements
  • Finally, despite the finding (that was not appealed) that IBM was in breach of its duty regarding the consultation exercise, the Court of Appeal held that it would be wrong to require a new consultation process before implementing the changes, and accordingly it did not grant an injunction as requested by the Representative Beneficiaries.

The Court of Appeal judgment confirms that in considering rationality, a Court must not simply substitute its own decision for that of the employer, and is likely to offer comfort to many employers who have closed their DB Plans to future accrual, sought to limit pensionable pay and / or have made discretionary benefit changes that have not been welcomed by the membership. The Court of Appeal's comments on what is required to form "reasonable expectations" in particular provide some useful certainty in relation to the strength and clarity of statements that would be required before a member could claim that "reasonable expectations" had been engendered, as well as when (and in what circumstances) those expectations can be disappointed.

Other helpful clarifications include: non-pensionability agreements that in effect "freeze" pensionable pay should not, as of themselves, be seen as a breach of duty and use of an exclusion power to "close" a pension scheme to future accrual is not necessarily the use of a power for an improper purpose. Of particular relevance to large corporate groups carrying out restructuring and other exercises, it was acknowledged that the "corporate veil" should not be pierced except in the most extreme of circumstances, and the actions or knowledge of one group company should not be attributable to another.

Despite these clarifications, this lengthy litigation does highlight the need for employers and trustees to exercise caution (including in consultation) in drafting member communications and other documents.