The Court of Appeal has overturned the decision in IBM v Dalgleish. It was held in the High Court that IBM UK Limited had breached its contractual duty of trust and confidence to its employees in carrying out a number of changes to its pension scheme and requiring employees to sign “non-pensionability agreements” as a condition of receiving pay rises. It was also held that IBM UK Holdings, as principal employer, had breached its duty of good faith (known as the Imperial duty of good faith) in making the changes to the pension scheme. 

The decision in the High Court turned on a finding that “reasonable expectations” had been engendered by the previous actions and communications of IBM UK and IBM UK Holdings. It found that any decision that frustrated those “reasonable expectations” would be voidable as a breach of the duty of trust and confidence or the Imperial duty of good faith (as applicable) unless there was no other possible course available.

The appeal was determined on the issue of breach of these duties. The Court of Appeal held that the test for a breach of both the Imperial duty of good faith applicable to those exercising non-fiduciary powers under pension schemes and the employer’s duty of trust and confidence is a rationality test equivalent to that of the public law test in Wednesbury: the employer or the person exercising the power must take account of relevant matters (and no irrelevant matters) and the decision must not be arbitrary, perverse or capricious. The test however is one of commercial rationality and logic and not of reasonableness. The Court of Appeal noted that a test of reasonableness could result in the court substituting its own decision which is not its role.

No higher duty arises from “reasonable expectations” engendered by previous actions and communications. Those previous actions and communications, and any expectations that employees or members may have as a result, are relevant considerations but have no special status. 

Comment The High Court decision was controversial in finding a remedy based on “reasonable expectations” where the communications and conduct fell short of the requirements for a contractual obligation or an estoppel. While enforceable rights do arise from conduct and communications under the doctrines of estoppel, “custom and practice” and negligent misrepresentation, the conditions for such rights must be met. Employers should still consider their communications and dealings with care to ensure no unintended liabilities arise.

The Court of Appeal also noted the need to allow discretions to be exercised repeatedly and consistently without resulting in the relevant discretion being lost. This is consistent with the decision in Prudential Staff Pensions v Prudential Assurance.

The validity of “non-pensionability agreements” is confirmed: an employer can require employees to agree that a pay rise will be disregarded for pension purposes as a condition of granting the pay rise. 

This has also been confirmed in the separate decision of the Court of Appeal in Bradbury v BBC which also considered other potential challenges based on the restriction on the right to surrender a pension under section 91 of the Pensions Act 1995 and allegations of discrimination and improper motive.