4. Past Scheme practice does not give rise to "reasonable expectations" that the practice will continue in the future
In Thompson (PO-1203), the Deputy Pensions Ombudsman has not upheld a complaint by Mr Thompson, a member of the main scheme, the GE Pension Plan and a top-up arrangement in relation to a decision by the employer and trustee of the schemes not to grant discretionary increases for pensions accrued before April 1997 from 2010 onwards. In particular, the Ombudsman turned down the member's complaint that the employer had breached its implied contractual duty of good faith to its employees by refusing to grant increases from 2010 onwards and for the way in which it had made that decision.
Breach of duty of good faith
According to Mr Thompson, the employer had breached its duty of good faith to its employees by refusing to grant discretionary increases in relation to pre April 1997 service from 2010 onwards; such increases had always been granted in the past. The employer had an implied contractual obligation to provide the pension increases due to existing custom and practice. Relying on the High Court's recent decision in IBM v Dalgleish , Mr Thompson also argued that as the benefit had always been granted in the past, this had given rise to "reasonable expectations" for the affected members that it will be continued.
The concept of members' "reasonable expectations" in the context of an employer's duty of good faith, was developed considerably by the High Court in the recent case of IBM v Dalgleish – for our update on that decision, click here. The Deputy Pensions Ombudsman stated, however, that the IBM judgement did not support the view that past practices are sufficient to give rise to reasonable expectations that a benefit will continue to be awarded. Fact that the benefit had been granted in the past cannot be said to give rise to a future expectation, particularly, as was the case here, where that benefit was discretionary rather than an existing right of members which was being curtailed or limited.
As to Mr Thompson's assertion that members had been given assurances in 2002 that the discretionary practice will continue, the Ombudsman found that the member had not produced any evidence to support this assertion. However, as the assurances which the member was purportedly referring to where made in 2002, a full 8 years before the increases were disapplied, the Deputy Ombudsman stated that it was unlikely that any assurances given would be expected to apply indefinitely and over such a long period of time.
Exercise of discretion to grant increases
The rules of the Plan provided that discretionary increases could be awarded by trustees "if the Principal Employer so agrees". Under the top-up arrangement, the principal employer had the power to making increases "if the Trustees so agree".
In relation to the Plan, Mr Thompson argued that the rules in effect required the Principal Employer to exercise its discretion once the Trustees had decided whether they were going to exercise their discretion. However in 2010 while a trustee meeting was in in progress, the Principal Employer sent an email to the trustees stating that it did not agree to discretionary increases for 2010. By not waiting for the Trustee to first make the representation, the principal employer had acted contrary to the rules. As the trustees had not exercised their decision first, this was also a breach of trust.
The Deputy Ombudsman turned down Mr Thompson's arguments, pointing out that even if the trustees had exercised their discretion agreeing to the increases, it would not be a foregone conclusion that the increases will be applied. In practice, the Company's permission will still be required. It was, therefore, of no functional significance whether the Company expressed its opinion before or after the trustees had considered its matter.
It was expected by many when the IBM judgment was handed down there would be an increase in the use by members of the "reasonable expectations" argument to challenge changes to their pensions arrangements and the current complaint is likely to be one of many to come before the Ombudsman in the coming years (unless of course the IBM decision is successfully appealed).
However, the Deputy Ombudsman's interpretation of the IBM judgment seems to be somewhat at odds with the judgment given by Warren J in that case. The Ombudsman's determination sates that
" The fact that the benefit was granted in the past cannot on its own be said to give rise to a future expectation…. The IBM judgement does not support the view that past practice is sufficient to give rise to a reasonable expectation that a benefit will continue to be awarded …"
Warren J had however stated in IBM in the context of IBM's favourable early retirement policy that this was
"a Reasonable Expectation. Action by Holdings contrary to that Reasonable Expectation is at least capable of engaging the Imperial duty. The Expectation was, however, the result of a policy and a practice. Policy and practice can obviously be changed for the future in respect of future service. Whether it can be changed in respect of past service is a different question."
The Ombudsman's determination also states that "there would need to be more than a statement of intention to give rise to a reasonable expectation". However, in contrast, Warren J had said in IBM that a promise or guarantee could clearly create a Reasonable Expectation but an employer's statement of intention could also do so, though the most that members could expect from statements of intent is that the employer will not change its intention without some rational ground to do so.