In the early 1980s, a decision was made to establish a "C Plan" alongside IBM's Main Pension Plan. IBM rejected an "Initial Proposal" which had been formulated for the C Plan and would have provided members with a normal retirement age of 60, plus the ability to take a reduced pension from age 50 with IBM's consent. An alternative "flexible retirement" option was subsequently proposed, which entailed a normal retirement age of 63 and a right to retire from age 60 without consent.
The alternative option was approved at a meeting held in December 1982. The judge found on the evidence before him that it had been intended that active (though not deferred) members would enjoy the flexible retirement option from the age of 60.
While drafting the Trust Deed and Rules for the C Plan, an IBM pension specialist who was drafting the documentation and the scheme's benefit consultant noted that, if actives were granted the right to flexible retirement, the impact of the Preservation Requirements would necessitate that right being extended to deferreds as well (contrary to IBM's intentions). To prevent this from happening, they decided that the Trust Deed and Rules should include a provision stating that the ability of actives to take early retirement was subject to IBM's consent. However, crucially, this advice (and the proposed provision in what became the 1983 Trust Deed & Rules) was not communicated to the relevant decision-makers within IBM or the trustee.
The 1983 Trust Deed and Rules were duly executed, incorporating the requirement for IBM's consent for early retirement. On six occasions between 1990 and 1997, the 1983 Trust Deed and Rules were replaced (importantly, not simply amended), each version containing materially identical wording in respect of flexible retirement.
The trustee's application
The trustee made an application to court to rectify the provisions of the 1983 Trust Deed and Rules (and subsequent versions) so as to give both active and deferred members a right to flexible retirement.
The court's decision
The High Court decided that the common intention of IBM and the trustee was that the 1983 Trust Deed and Rules should provide flexible retirement for actives. As a consequence, the provision requiring IBM's consent should an active wish to retire at 60 had to be removed. However, the court also found that the intention of the parties was positively not to grant deferreds such a right, as a result of which the trustee's application in respect of those members was rejected.
IBM had strongly argued that rectification should not be granted for actives even if, viewed in isolation, it could be shown that IBM and the trustees intended them to enjoy a right to flexible retirement. This was because the effect of the Preservation Requirements was that such rights would have to be extended to deferreds, even though they were not intended to have them. The only way to avoid that outcome was, IBM said, to deny actives the right to flexible retirement.
The court rejected IBM's argument. It decided the fact that rectifying the Plan's provisions in relation to actives would have "unintended consequences" for deferreds, was no reason not to grant rectification.
Duty of good faith and confidence
In a further judgment handed down in December 2012, the court had to decide whether the duty of trust and confidence which IBM owed its employees required it to consent to a Rule amendment. This amendment had been proposed by the trustee after the judgment handed down in October 2012. Had IBM agreed to that amendment, deferreds would have been granted the same right to flexible retirement which the court had earlier ruled that only actives enjoyed.
The trustee's case was that, because of the retrospective nature of rectification, active members always enjoyed the right to an unreduced pension from age 60. Until 6 April 2005, the Preservation Requirements required IBM to confer such a right on deferreds. By refusing to consent to a Rule amendment now, IBM was in breach of the duty of trust and confidence which it owed its employees.
In response, IBM said that it was under no duty to consent to a Rule amendment now because the Plan already complied with the Preservation Requirements after they had been amended from 6 April 2005.
The parties differed on the scope of IBM's duty of trust and confidence. IBM argued that the test was not whether its refusal to agree to the amendment was unreasonable, but rather whether it was irrational or perverse. In response, the trustee said that you had to ask whether IBM's conduct might destroy or seriously damage the relationship of trust and confidence with its employees.
Without definitively deciding the correct test, the court recognised the force in IBM's case. It noted that, if an employer is not acting irrationally or perversely, it could be acting within the range of decisions an employer could reasonably make.
However the test was framed, the court came down in favour of IBM, ruling that, although IBM might have been compelled to agree to the trustee's request had it been made before 6 April 2005, IBM was under no duty to consent now.
A particularly interesting aspect of the case was the fact that in 1990 - 1993, 1995 and 1997 new Trust Deeds and Rules were executed which replaced the Plan's provisions. Further, the decision-makers in those later years were different from those who had agreed the 1983 Trust Deed and Rules and there was no evidence that the later decision-makers either read the 1983 Trust Deed & Rules or had any intention at all in relation to flexible retirement when they came to sign the later documentation.
The judge acknowledged that seeking to rectify documentation when the decision-makers had no specific intention at all regarding flexible retirement was problematic.
Here, however, the judge was inventive and found that, in those circumstances, "a different intention" might be sufficient. To obtain rectification, it might be enough to show that the later decision-makers had a "more abstract, higher level, intention" to continue what had gone before.
IBM's contractual counter-claim
IBM argued that members' pension rights under the Plan were governed by what had been set out in employee handbooks and pensions booklets; both of which stated that early retirement before age 63 required IBM's consent. IBM asserted that the handbooks and booklets were incorporated into employees' employment contracts and overrode the Plan's provisions as rectified.
However, the court also rejected this argument. The judge found that the handbooks and the booklet merely described the Plan. Those materials were worded at the time so as to require IBM's consent for early retirement but were treated as subject to the Trust Deed & Rules as rectified. Consistent with a number of pensions cases, the handbooks and the booklets were not regarded as overriding and of contractual effect when they were explicitly stated to be subsidiary.
Points to note
It is noteworthy that nowhere in the first judgment is there any discussion of the fact that, if IBM and the trustees had been asked when they signed the 1983 Trust Deed and Rules whether they intended to give actives the right to flexible retirement (even if this meant that deferreds could ultimately require such a right themselves), they would presumably have said "No".
Moreover, the judge did not refer to the discretionary nature of the remedy of rectification, which might have enabled him to refuse to rectify the Plan even if the requirements for rectification had been met. The grounds for refusing rectification once it is decided a deed does not reflect the parties' intentions are limited. However, the fact that the court's order meant that protections deferred members would have had at the time were lost arguably might have justified a different result.
While it was clear from the evidence that, viewed narrowly and in isolation, IBM and the trustee intended to give active members a right to flexible retirement, presumably this was not their intention at any cost. In particular, the late amendments made to the Rules in 1983 suggest that the relevant decision-makers did not intend to create a structure that failed to comply with the legislation and Revenue requirements at the time. There is no discussion of this in the judgment.
The way the judge approached the "serial rectification" issue was particularly interesting and provides a practical lesson for decision-makers within bodies of trustees and employers who are executing consolidating documentation. This may mean that rectification is feasible in more cases than had previously been thought possible.
Although the underlying approach taken to the application to rectify the 1983 Trust Deed & Rules was not unusual (though, as noted, the Court's approach to the later documentation might be more fragile), the practical outcome of IBM may give rise to controversy, and it will be interesting to see if the case is appealed.