In the space of a week, the Court of Appeal has ruled in favour of 2 household names, IBM and the BBC, in judgments about the good faith duties owed by employers to their employees in the context of pensions. The decisions may be helpful for employers considering ways to reduce their ongoing pension liabilities in future.

Bradbury v BBC

Mr Bradbury, a member of the BBC Pension Scheme, sought to challenge a proposal by the BBC to cap future increases to “pensionable salary” under the Scheme, at 1% of the actual pay increases received by employees (the “Cap”). Under the proposal, members who agreed to the Cap would receive a 2% pay rise. Those who rejected the Cap would not receive the rise.

One of Mr Bradbury’s arguments was that the BBC’s conduct breached its duty of trust and confidence to its employees, implied by law into every employment contract. Mr Bradbury argued the proposal singled out the class of employees who rejected the Cap for less favourable treatment.

The court found that the BBC had not breached its duties as it had not acted irrationally or perversely, or in a way that was likely to damage the relationship of trust and confidence between the BBC and its employees. Without reform, the pension deficit would have risen to 10% of the licence fee. The court also held the proposals did not single out a class of employees, as all employees were offered the same choice: whether or not to accept the pay rise.

IBM v Dalgleish

IBM challenged a High Court ruling which held it had breached its good faith duties towards its employees. As in Bradbury, these included the implied contractual duty of trust and confidence, but also a pensions-specific duty of good faith, applicable to employers exercising a discretionary power under a pension scheme.

Here, IBM had used its powers under the scheme to close the scheme to members, change its early retirement policy and freeze future increases to pensionable salary. The proposal to freeze pensionable salary would apply to members who signed “non-pensionability agreements”. Members who refused to sign would not generally receive future pay increases.

The Court of Appeal held that an employer’s good faith duties are only breached where they act in an irrational or perverse way, and that this is a high standard not met in this case.

The High Court had applied a similar standard, but had ruled against IBM, referring to assurances given by IBM to employees during previous rationalisation projects, that there would not be further changes to members’ benefits in the near future. In the Court of Appeal’s view, although employee expectations were a relevant factor when deciding whether the employer acted irrationally, the High Court had overvalued their importance.

Comment

Bradbury and IBM give employers far more flexibility around how they make changes to pension benefits, with both cases ‘downgrading’ the importance of the implied duty of good faith.

However, the cases should not be seen as giving employers free rein to abandon careful and considerate reform of their pension schemes. Clearly, the court felt there was a strong public policy argument that employers should be able to reduce their pension costs, but this power should not be abused. There are still many statutory requirements which must be followed if changes are to be made.