Employers may be forgiven for thinking that it is now "open season" on any difficult decision they may take, in light of the High Court's decision in IBM that IBM was in breach of its duties in (the manner and timing of) closing its defined benefit scheme to future accrual and the Supreme Court's decision in Braganza that BP did not take a decision correctly on whether benefits were payable following the death of an employee. Nevertheless, the High Court decision in Bradbury shows that where employers – and trustees, too – act reasonably and adopt a correct process, it should not be possible for their decisions to be challenged successfully.
It also highlights, however, just how many ways disgruntled employees and members may find to challenge a decision. We have helped many employers and trustees who have been facing a difficult decision to "get it right", so if you are facing one, please feel free to call your usual Taylor Wessing contact for help.
The essence of the case
A bit like IBM, this is the latest instalment in a long-running saga (see also our previous article on this case) that has already seen a first Pensions Ombudsman determination and follow-on High Court Judgment, then a consequential Pension Ombudsman determination before this latest High Court judgment. Further, the High Court judge is the same as in IBM (Warren J) and as we will see, the key issue here was ultimately the same as that in IBM, but with a different outcome.
The case concerns whether the BBC was able to cap the pay of members of its defined benefit scheme so that only 1% of any future increase is pensionable. Most aspects of the complaint were disposed of in favour of the BBC by the first High Court judgment, but one aspect was remitted to the Pensions Ombudsman for further consideration and then came back to the High Court on appeal, after the Pensions Ombudsman had done so. That aspect was whether the BBC was in breach of its duty (as implied into the contract of employment) not to destroy or seriously damage the trust and confidence that Mr Bradbury has in it without reasonable and proper cause ("the Implied Term") by seeking to impose the cap: the Pensions Ombudsman said that it was not and the High Court agreed.
Trust and confidence
The barrister team acting for Mr Bradbury framed his case broadly: they needed to, to even have a chance of getting a favourable decision.
On its face, as the barrister team for the BBC argued, this was a case about how the BBC had exercised a discretion that it had about increasing pay. Cases like Keen v Commerzbank, Clark v BET PLC and Horkaluk v Cantor FitzGerald indicate that all the BBC should need to prove was that it had exercised its discretion in that regard rationally (and viewed objectively, there seemed little doubt that it had). So the barristers for Mr Bradbury focused largely on the process that the BBC had embarked on and argued that it was flawed in a way that destroyed or seriously damaged Mr Bradbury's trust and confidence in the BBC.
There was much debate about how it should be determined whether the BBC was in breach of the Implied Term and the judge settled on what was termed the "Unvarnished Mahmud test1". The judge said that, in essence, this test involves establishing whether the employer's particular course of action is a reasonable and proper response to a given state of affairs and situation, in the context of the Implied Term, so as to prevent what would otherwise be a breach of duty from being one. Nevertheless, the judge is equally clear that this did not involve determining whether the BBC's conduct fell within the "range of reasonable responses", which, as a test, the Court of Appeal had rejected in Mahmud.
So, it is easy to see why Mr Bradbury's team argued that the Pensions Ombudsman may have applied the wrong test when assessing the BBC's compliance with the Implied Term in his latest determination – criticisms which Warren J dismissed – and equally why it may be difficult for employers to know in any given case whether their conduct falls the right or wrong side of the line.
The BBC's conduct
Faced with a substantial deficit in its defined benefit pension scheme, the BBC offered members three options:
- remain in the final salary section and agree that all future salary increases would be pensionable only on the first 1% of the increase;
- leave the final salary section and join a new career average section, in which all of each salary increase would be pensionable; or
- leave the scheme altogether and join a defined contribution arrangement.
It engaged in consultation about the options and also made some refinements to them as a result.
Criticisms of the proposals in principle
The criticisms of the BBC's proposals in principle (i.e. as to whether they should have been implemented at all, irrespective of the process embarked on) were:
- the BBC had engendered reasonable expectations that all pay would be pensionable in accordance with definitions under the scheme rules or, if that was not to be the case, that an amendment would be made to the rules, rather than individual contractual arrangements being made with members. The judge held that, as this was not a point made before the Pensions Ombudsman, it was too late to run it now, but, in any event, the BBC had not created any such reasonable expectations through its past actions or communications; and
- the structure of the proposals gave only hard choices to employees and this amounted to improper coercion, which the Pensions Ombudsman and the judge dismissed:it is not improper coercion merely to present someone with a hard choice.
Criticisms of the process
The criticisms of the process that the BBC embarked on were:
- the proposals were designed for a collateral purpose: to make the pension scheme less attractive to long-serving and under-performing staff, thus encouraging them to leave the BBC. However, the Pensions Ombudsman and the judge held that, in fact, the proposals were designed as a response to the deficit in the defined benefit scheme and the BBC was entitled to have implemented them, rather than others that might have had a lesser effect on long-serving members;
- the proposals discriminated against younger workers unlawfully. The judge did not go into any details of the argument because, as Mr Bradbury was not a member of the disadvantaged class anyway, it was not open to Mr Bradbury to run the argument, given that the alleged discrimination was not so extreme as could be said to have undermined the trust and confidence of all employees in how the BBC was running its business;
- it engaged in consultation with employees with a closed mind and did not engage with the pension scheme trustees sufficiently. The judge held that, in fact, the process undertaken – by which the BBC sought to obtain contractual agreement to the cap when it considered that it had a unilateral right to impose one, and that it refined its proposals in light of member feedback – shows that it did not have a closed mind. Further, the BBC did not engage with the trustees in advance of the consultation as it was obvious that there was not the time to agree anything meaningful with them before the next actuarial valuation was undertaken, and the trustees were permitted to make representations during the consultation process.
In rejecting the appeal against the Pensions Ombudsman's determination and so finding in favour of the BBC, the judge said that it was not a conclusion that he reached with any reluctance. This gives some comfort to employers that, if they take decisions that are rational and do so properly, engaging in the right process, they can withstand any later challenge.