In two recent cases the Court of Appeal have taken a pragmatic approach when considering the issue of trust and confidence, and in one of the cases, the duty of good faith, in finding for the employer where the employer sought to make pension savings to its defined benefit pension scheme(s).
In a case involving the BBC, the Court held that the BBC was entitled to cap at 1% the part of a pay rise that would be used to calculate pensionable pay in the final salary sections of its pension scheme in circumstances where the BBC was facing a multi-billion pound deficit in its scheme.
In a case involving IBM case, the Court held that IBM had not breached its duties of good faith and trust and confidence in relation to pension changes to its defined benefit pension schemes which were designed to make significant cost savings.
The facts - BBC
In 2010, the BBC concluded that the deficit and future burdens of the BBC Pension Scheme were and would remain unsustainable and as such it established a new career average section of the Scheme ('CAB2011') and a new defined contribution pension scheme ('BBC LifePlan'). The Scheme already had pre-existing final salary sections ('Old Benefits Section' and 'New Benefits Section') and a career average section ('CAB2006'). In addition, existing Old Benefits Section, New Benefits Section and CAB2006 members were offered by the BBC one of three options:
Remain in their existing Section but with only 1% of any future pay increases to count as Basic Salary (and therefore pensionable pay) from April 2011 (the 'Cap').
Opt out of their current Section and join the new CAB2011, without the Cap applying.
Leave the Scheme and join the BBC LifePlan for future service.
Mr Bradbury, a member of the New Benefits Section objected to the imposition of the Cap and contended that it breached his right to a future pension linked to his final pay. He also objected to the process by which the BBC had arrived at the three options and the means by which it sought to implement the changes to the Scheme, i.e. it sought to agree the Cap with employees individually, which Mr Bradbury contended marginalised the Scheme's trustees and the trade unions.
Under the New Benefits Section of the Scheme, "Pensionable Salary" was defined by reference to a "Member's Basic Salary from the Employer" and included "such other regular additions to Basic Salary as the BBC may determine from time to time …". "Basic Salary" was defined as "[T]he amount determined by the BBC as being an Employee's basic salary or wages …". There was a dispute between the parties in relation to the effect of the words "determined by the BBC" in this definition, with the BBC asserting that this meant it could decide whether an increase in pay counted as Basic Salary and accordingly this allowed it to determine whether a pay rise was pensionable or not.
Mr Bradbury initially submitted a complaint to the Pensions Ombudsman which was dismissed. He then appealed to the High Court which held that the definition of Basic Salary did not permit the BBC to determine whether a pay rise counted as Basic Salary, but the Court also remitted back to the Pensions Ombudsman the question as to whether the employer's implied duty of trust and confidence had been breached. The Ombudsman dismissed this remitted complaint, holding that overall the BBC's conduct was not calculated or likely to seriously damage the relationship of trust and confidence. Mr Bradbury's further appeal to the High Court was dismissed. He subsequently appealed to the Court of Appeal, which unanimously found for the BBC.
The Court of Appeal held that:
The BBC was entitled to determine whether a pay rise counted as Basic Salary and limit how much of the increase counted as Basic Salary (on a proper construction of the language used).
The Cap was not contrary to the Scheme rules.
The BBC had not breached its implied duty of trust and confidence. Its conduct had to be assessed against the reality of the enormous Scheme deficit and that the Scheme's trustees, the unions and the BBC had all agreed that something had to be done.
The facts - IBM
As a result of IBM seeking to implement savings across its operations worldwide due to an earlier commitment made to investors, in 2009 it looked to instigate pension savings in the UK (this exercise known as 'Project Waltz'). Amongst other things, the changes proposed under Project Waltz included:
Closing to future accrual its two defined benefit occupational pension schemes.
Making pay increases for the defined benefit members non-pensionable via non-pensionability agreements ('NPAs') (so that the future pay increases would not count towards final pensionable salary in relation to the accrued defined benefit service up to the date of closure) which if not agreed to, would result in an employee not receiving a pay increase in 2009.
Introducing a cost neutral early retirement policy.
Changes had been made to the two defined benefit schemes between 2004 and 2006 but IBM said further changes were necessary under Project Waltz due to both international and local business needs. Members were extremely opposed to the proposed changes, and the schemes' trustees refused to introduce the changes without obtaining a court declaration that they were legally valid. IBM made a court application and Project Waltz was implemented pending the outcome of the proceedings.
At the High Court, the judge held that IBM had acted in several respects in breach of the duty of good faith imposed on a party exercising a non-fiduciary discretionary power under an occupational pension scheme, in large part due to the reasonable expectations of the members due to communications made in respect of the 2004-2006 changes. In addition the contractual duty of trust and confidence had been breached due to employees being presented with NPAs to sign and being told that they would only receive a pay increase if they did sign.
The Court of Appeal disagreed with the High Court on the points of good faith and trust and confidence. The Court held that it was erroneous to conclude that despite the fact that the changes were the result of a "rational commercial decision", they could not be justified due to the members' reasonable expectations. Instead, the key question was whether the decision taken was one which no rational decision-maker would reach, and that while reasonable expectations were relevant factors, they had been elevated by the High Court judge to a status which had overriding significance over and above all other relevant factors including the financial and economic circumstances.
What does this mean for employers
The good news for employers is that these cases highlight that an employer's economic situation is relevant and will be taken into account by the Courts when assessing an employer's overall conduct in relation to the employer's duty of trust and confidence, and the duty of good faith, and that, as a result of the IBM decision, the door on the reasonable expectation argument for members / employees has effectively been shut.