The recent Court of Appeal decisions in IBM United Kingdom Holdings Ltd and another v Dalgleish and others and Bradbury v BBC give some clarity and comfort to employers who are considering making changes to schemes that they sponsor.

In Bradbury v BBC, the employer was seeking to reduce the scheme's deficit through changes to future accruals, giving members the choice of:

  • Opting out of the scheme and joining a defined contribution scheme;
  • Opting out of their current final salary section of the scheme and moving to a newly set up career average section; or
  • Remaining in the final salary section but with a cap on the amount of any future pay increases which would count as Basic (pensionable) Salary.

The Court of Appeal, dismissing Mr Bradbury's appeal, held that Mr Bradbury had no contractual right to future pay increases. It concluded that the BBC was entitled, on a proper construction of the definition of Basic Salary in the BBC pension scheme rules, to limit the amount of any increase that would count as Basic Salary.

The Court of Appeal also agreed with the earlier finding by the High Court that the BBC had not breached its implied duty of trust and confidence nor had it acted irrationally or perversely, The BBC's conduct had to be assessed 'against the reality of the background that the [BBC] was faced with a multi-billion pound deficit in the Scheme.', and it was clear that some action was required.

In reaching its decision to dismiss Mr Bradbury's appeal, the Court did not need to consider the question that had been put to it as to whether the Cap was a breach of section 91 of the Pensions Act 1995. Mr Bradbury argued that section 91 protected his accrued rights as well as his future rights on the basis he had an existing right to a future pension based on his final pay.

The question was considered, however, with Lady Justice Gloster noting:

'Section 91 protects the actual, accrued rights of employees. It applies where a person 'has a right to a future pension'; it does not apply where a person may acquire a future right to a pension, as a result of a future increase in Basic Salary; i.e. to have a future pay increase. This analysis is supported by the decision of this court in International Management Group (UK) Ltd v German [2011] ICR 329 at [27]-[28]' (Paragraph 45)

The change that the BBC was asking employees to make was to their contract of employment rather than to their pension provision, meaning that there was no breach of section 91.

In IBM United Kingdom Holdings Ltd and another v Dalgleish and others proposals relating to two IBM pension schemes were made by IBM. The proposals included: closure to future accrual, new early retirement policies, making future pay increases non-pensionable and an option for active members to transfer to a new scheme.

A challenge was brought as to whether the employer, in carrying out these proposals, breached its implied contractual duty of good faith (described as the Imperial duty of good faith). The High Court concluded that IBM had breached both its implied duty of good faith and its duty of trust and confidence. In reaching the decision that IBM had breached its implied duty of good faith, the High Court placed a significant amount of weight on the reasonable expectations of the scheme's members. Warren J concluded that reasonable expectations meant expectations of what would happen in the future engendered by an employer's own actions. Warren J said that disappointment of reasonable expectations was a 'very serious matter going to the heart of the relationship' of employer and employee. In addition, Warren J found that in giving members the choice between signing a non-pensionability agreement regarding pay increases and not receiving a pay increase, IBM was in breach of its implied contractual duty of trust and confidence.

The Court of Appeal allowed IBM's appeal, holding that the correct test is a 'rationality test' equivalent to the Wednesbury test. The first question to be decided is whether only relevant and no irrelevant matters have been considered, and then whether the result could be considered perverse. When taking this approach the reasonable expectations of members are a relevant factor, but not an overriding one.

There was no allegation in the case that relevant factors had been left out or that irrelevant factors had been considered. Therefore the question before the Court was whether the decision was one which no rational decision maker could reach. The Court of Appeal concluded that Warren J had placed undue weight on members' reasonable expectations above the other relevant factors. Although Members' expectations were a relevant factor which a decision maker may, and where appropriate should, take into consideration in the course of its decision making process, it was erroneous to elevate reasonable expectations to a status over and above other relevant factors.

Members also brought a complaint that there was a defect in the way in which the consultation process had been conducted. Warren J had held that IBM had acted in breach of the Consultation Regulations, specifically:

  • Failure to make it clear that the drive behind Project Waltz was the 2010 Earnings Per Share targets;
  • Failure to provide information requested by the Pensions Consultation Committee;
  • The Intended Closure Date was deliberately mis-stated; and
  • Consultation was not undertaken with an open mind - the Employers' minds had been made up before the process began.

IBM's position was that remedies available in the Consultation Regulations should apply and nothing more. Warren J had held that the Consultation Regulations did not preclude a claim based on a breach of contractual duty of good faith and therefore ordinary contractual remedies were available. On appeal to the Court of Appeal, the representative beneficiaries also tried to claim that the failure to consult properly breached the Employer's Imperial duty of good faith and that an injunction should be awarded requiring IBM to conduct the consultation properly. The Court of Appeal held that an injuction would be too radical a requirement as it would require the unravelling of the Pensions Reorganisation project, Project Waltz. Instead the Court of Appeal held that the representative beneficiaries were entitled to bring a claim for damages for breach of the contractual duty in the conduct of the consultation.

It is understood that this decision will not be appealed.

While both judgements provide useful guidance and a degree of comfort to sponsoring employers making or planning changes to schemes, much still turns on the specific wording of a scheme's rules and the prevailing circumstances. The case also highlights the importance of conducting proper and meaningful consultation on any changes an employer is considering implementing. Employers should ensure they discuss any planned changes with their legal advisors to understand and manage the risks.