In April of this year, the High Court handed down its judgment in IBM UK Holdings Ltd and another v Dalgleish and others. The facts of the case are complex, leading to a judgment described by Mr Justice Warren himself as “stupendously long” but, broadly, the case concerned the actions taken by IBM regarding its decision to close its defined benefit ("DB") schemes to future accrual. The case also focuses on the employer’s actions in the process of closing the schemes to future accrual, raising concerns that there had there been a breach of IBM’s implied duty of good faith and its contractual duty of trust and confidence.
The facts are very complicated and involve more than 5,000 members spread over two DB schemes which had in place a variety of benefit structures. In short, IBM implemented a number of changes to its DB schemes during the period 2004 to 2011. The most notable historical changes to the DB schemes were implemented as part of Projects "Ocean" and "Soho". These included increases to contributions from members and members being given an opportunity to either remain in the DB schemes with two-thirds of salary increases being pensionable or to transfer to an enhanced DC plan.
The latest changes to its DB schemes made by IBM took place between 2009 and 2011, under the name Project “Waltz”. These changes involved closure to the future accrual of benefits, imposing new early retirement terms and withholding pay rises from DB scheme members who did not agree to break the link between DB pension accrual and final salary.
IBM implemented closure to future accrual by using an “exclusion power” in the scheme rules. This said that the principal employer could exclude “any specified person or class of persons” from membership.
The scheme trustees were cautious about the changes made under Project “Waltz” so sought guidance from the court as to the legality of the same.
Mr Justice Warren’s Judgment
Mr Justice Warren determined in his judgment that IBM had, through Project Waltz, breached both its implied duty of good faith not to destroy, or seriously damage, the relationship of trust and confidence between the company and the scheme members, and also its contractual duty of trust and confidence. The rationale for Mr Justice Warren reaching these conclusions is based largely on the following factors:
- Members had, understandably, "reasonable expectations" about the future provision of benefits under the DB schemes based on the company's previous benefit change exercises. The court undertook a close examination of communications with members from Projects Ocean and Soho. These investigations concluded that IBM had indeed not in fact provided any guarantees to scheme members. The court found that IBM had been careful to avoid saying it would never close the schemes and they focused in on phrases used by IBM, such as a “continuing commitment” to the DB schemes, putting the schemes on a “secure” footing and a “commitment to underpin [their] sustainability”. It concluded that these words were not just vague expressions of intent, but communications which shaped many affected members’ decisions in respect of their retirement plans. In light of these findings, the court noted that a reasonable member would be likely to have formed the reasonable expectation that benefit accrual would continue into the future, unless financial and economic circumstances changed; and that the amended early retirement policy would continue unless there was a relevant and real justification for a change.
- The view was taken by the court that the implementation of Project Waltz seriously conflicted with members' reasonable expectations. An irrationality and perversity test was applied, whereby it was assessed if a reasonable employer could and ought to act in the same way that IBM had acted, in light of the reasonable expectations held by members. The breach of these reasonable expectations of members via the closure of the schemes a few years later was, on the facts, a serious matter which went to the heart of the relationship between IBM and its employees. One particular concern was that the period of time between phases of change had been too short. Projects Ocean and Soho had taken place in 2004 and 2006 and Project Waltz began just three years later.
- The court decided that the statutory consultation process was not carried out in a way which was open and transparent, although it appeared to satisfy the strict requirements of consultation and the court took the view that members were deliberately given misleading information regarding the timing of the closure to future accrual and the rationale behind the proposals. Internal communications were also found to support the argument that the company had not kept an open mind during the consultation process. The communication also misled the trustees and members about the real date IBM had in mind for implementation.
- Implications for other scheme changes.
This case has proved to be very useful in bringing to the fore a number of practical considerations to bear in mind when considering and implementing DB scheme benefit changes.
Consider members’ expectations in light of present and past communications
The IBM case has certainly made clear that in the future, any scheme wishing to effect benefit changes, will need to very carefully consider what reasonable expectations members are likely to have, following receipt of a formal communication informing them of the proposed changes. The key point to extract from this case is that seemingly innocuous wording and everyday language has been interpreted in such a way as to penalise the employer. Great care must be taken not to use wording that may mislead and to very carefully review previous communications to assess what message may have been conveyed to members about their future benefit entitlements at that time.
Internal employer correspondence may be scrutinised
It was not only member communications that were scrutinised in this case. Internal correspondence was examined by the court to gain a broader view of the context in which decisions about benefit changes were being made. Employers must be acutely aware that any communications at all regarding benefit change proposals could well be reviewed at a later date, should a dispute or concern arise.
Give trustees honest reasons for changes
IBM were criticised for not providing trustees with full and honest answers to questions about the intention behind the benefit changes. Employers should now be prepared for trustees to ask more questions and seek greater assurances, and they should be willing to supply them with these. If you are a trustee, you should take this case as an opportunity to now seek greater assurances for members and ask more challenging and probing questions of employers about their intentions.
Do not presume result of consultation process
Employers should now understand the critical importance of not making final or pre-determined decisions until any consultation process has concluded and all responses have been considered. They must carry out a genuine consultation and certainly be prepared to revisit their initial proposals with an open mind in light of feedback received from members. Employers failing to do this could well find themselves in a difficult situation.
Timing between changes will be reviewed
Finally, the case indicates that the changes proposed by IBM might otherwise have been acceptable had there been a longer period between the various benefit change projects. Therefore, where a considered approach is taken, and changes are not rushed through in a short timescale, it is more likely that an employer will be acting in accordance with the duty of good faith owed to its employees.
This judgment does not specifically deal with the implications for IBM or the scheme members. A separate hearing will consider remedies that ought to be applied. The possible options include unwinding benefit changes or other financial remedies being ordered by the court.
IBM has sought leave to appeal the judgment, therefore the judgment in its current form may not end up reflecting the final outcome of the case. The true end to the matter could well be quite some time away.
Whilst this case sends out a number of important messages, it does not mean that other DB scheme change exercises will necessarily be in breach of the employer’s duty of good faith or trust and confidence. It does however emphasise the fact that employers will need to behave very cautiously and precisely when planning or implementing any future benefit change programmes.