The Court of Appeal has allowed an appeal by IBM against the High Court over changes it sought to make to the defined benefit (DB) parts of its two pension schemes in 2009.

IBM sought to make a number of changes as cost saving measures, including:

  • The use of exclusion notices to close the schemes to DB future accrual Ensuring future pay increases were not pensionable on a DB basis by using non-pensionability agreements (NPAs) A new policy which would only permit early retirement on cost neutral terms

In April 2014, the High Court held that IBM was in breach of its Imperial duty concerning the accrual of benefits and changes to its early retirement policy, and in breach of its contractual duty of good faith regarding the NPAs. In allowing IBM’s appeal against the decision of the High Court, the Court of Appeal agreed members’ expectations were a relevant factor to be considered. However, it was held that the High Court had approached the issue on an incorrect basis by placing “paramount significance” on members’ reasonable expectations such that “they had overriding significance over and above other relevant factors”.

The Court of Appeal stated that the correct approach in determining whether an employer’s act is in breach of its Imperial duty, or its duty of good faith, should be the application of a rationality test (i.e. whether the decision taken was one which no rational decision maker could have reached) together with an assessment of whether the employer had acted in a way which was “arbitrary or capricious”.

In applying this test, the Court of Appeal found that IBM had not breached the duty of good faith as it had been aware of and considered member expectations when making its decision.

Employers who have made similar pensions cost saving measures will be reassured by this decision. It does however serve as a useful reminder to employers and trustees alike that pension scheme changes must be planned extremely carefully. Moreover the importance of providing members with clear communications to manage their expectations cannot be underestimated. 3 year court battles are not for everyone.