Employers can draw comfort from two recent Court of Appeal decisions supporting exercises of discretion by two well-known organisations. Both cases concern final salary pension schemes: Bradbury v BBC and IBM UK Holdings Limited v Dalgleish. What lessons are there for employers from the cases?
A key aspect was whether the respective employers had breached the “duty of trust and confidence”, or its corollary when exercising discretions in a pension scheme’s rules, “the Imperial duty” (I refer simply to “the Duty” below, meaning to cover either or both of the duties, as relevant). In both cases, the Court of Appeal concluded that the relevant employer had not breached the Duty.
IBM, in particular, demonstrates how difficult it can be to challenge successfully an exercise of discretion by employers. The Court had some helpful words about the test that needs to be considered when analysing whether any employer has done so.
Members of the BBC pension scheme were offered various options about future pension provision. If that were to involve continued build-up of pension on a final-salary basis, members had to accept a cap on the amount of any future pay rise that will be pensionable. Mr Bradbury alleged that the BBC had breached the Duty in having a cap and in the process it adopted in implementing it.
Ultimately, the Court of Appeal decided that the BBC had power under the pension scheme rules to determine how much of an employee’s future pay would be pensionable and that it was perfectly entitled to exercise that power in the manner that it did.
The Court went on, anyway, to consider the Duty issues and noted that the BBC’s decision was a response to the multi-billion pound deficit in its final salary pension scheme, with the BBC, the pension scheme trustees and the unions all agreeing that something had to be done. There was nothing about the process that the BBC adopted that rendered the BBC in breach, so its decision to offer the options and proceed in line with them stood.
IBM made a series of changes to its final salary pension scheme over time that gradually reduced the value of pension provision under it. The final and most dramatic changes were ones that brought final salary pension accrual to an end and meant that any future rises in pay would not increase the value of accrued final salary benefits.
IBM was challenged on a number of bases, including for insufficient consultation (which was upheld by the High Court and was not challenged on appeal). Most importantly for present purposes, it was challenged on the basis of statements made on previous amendments to the pension scheme, which had generated reasonable expectations in the minds of members that IBM would not close the scheme to accrual - or at least, not until some later future date. It was held in the High Court that the failure to satisfy the reasonable expectations that had been generated was a breach of the Duty. The Court of Appeal disagreed.
The Court of Appeal was clear that the reasonable expectations that IBM had generated were simply one factor that IBM had to consider, when deciding how to proceed in relation to its pension scheme: those expectations had not (as the High Court had effectively held) been elevated to any higher status that meant that they could not be disappointed without the employer being in breach.
Lessons to be learned
In the IBM case, the Court was clear as to what the correct test is for determining whether an employer is in breach of the Duty in how it has exercised any discretionary powers under the employment contract or under a pension scheme.
With clear echoes of the way in which governmental bodies have to take decisions and consistently with what the Supreme Court said about employers in the 2015 case of Braganza v BP Shipping Limited, employers must:
- take account of all relevant factors and not any irrelevant factors; and then
- take a rational decision (in other words, it cannot be a decision that no reasonable employer could have taken, in the sense of there being no logic to the decision rather than there being any objective assessment of the relative merits of the decision).
The Court is not going to gainsay the commercial or other merits of an employer’s decision. Instead, the Court will focus on whether the employer has gone through the right process, and as these cases – particularly IBM – show, a court will not readily come to a conclusion that an employer has not done so.