The Court of Appeal has overruled the High Court’s landmark decision in the case of IBM v Dalgleish. The successful appeal overturns the High Court’s earlier ruling that IBM breached its duties as an employer in making certain changes to its occupational pension scheme.

This will be welcome news for those employers who have already altered or are seeking to alter their pension arrangements, but care will still need to be taken to ensure that members’ concerns are treated appropriately.

Duty of good faith

It is an implied term of any employment relationship that the employer will not act in a way that is likely to destroy or seriously the damage the mutual relationship of trust and confidence between employer and employee. This is part of the employer’s duty of good faith and this duty extends to the employer’s actions in respect of its pension arrangements.

‘Reasonable expectations’

In 2014, the High Court ruled that IBM had breached its duty of good faith to pension scheme members by closing the scheme to future accrual and introducing additional benefit restrictions. The scheme members successfully argued that previous statements made by IBM indicated an ongoing commitment to the scheme and those statements had created ‘reasonable expectations’ on the part of members as to the future of the scheme. Given the financial position of IBM, the High Court considered that nothing had occured which would give members reason to believe that their expectations as to future pension provision would not be met.

For more detail on the High Court’s initial ruling, please refer to our article, available here.

Rationality test

In overturning the High Court’s decision, the Court of Appeal found that too much importance had been placed on the potential disappointment of members’ ‘reasonable expectations’. While this was a factor to be taken into account, it should be weighed against other relevant considerations and should not be treated as the singular determining factor.

Instead, the Court of Appeal’s ruling adopts a rationality test. The questions to be asked in considering whether the duty of good faith has been breached are therefore (1) whether only relevant matters have been considered; and (2) whether the decision of the employer is one which no rational employer could have made. The ‘reasonable expectations’ of members would need to be considered by the employer but failure to meet those expectations would not necessarily result in a breach of the duty of good faith.

What happens now?

While the context here is clearly very specific, this is a long-running and high profile case which has culminated in the first appeal decision in this area of the law. The move away from the strict ‘reasonable expectations’ approach will come as a relief to those employers who have already made changes to their pension arrangements and those who are considering changes.

It remains unclear, however, how the rationality test will be applied by the courts in future cases and employers should always take care and seek appropriate advice when communicating with members or altering their pension arrangements.

A further important point for employers to be aware of is that the High Court’s comments in relation to proper conduct during statutory pension consultation exercises were not challenged on appeal. Therefore, employers should ensure that they are open with employees about the main reasons for change and they should consult with an open mind.

Employers should therefore act with the rationality test in mind when discussing all changes to employment terms. There is also the possibility that the latest ruling may be appealed to the UK Supreme Court and future developments should be monitored closely.