In April 2014, the UK High Court considered an employer’s implied contractual duty of trust and confidence to the members of its pension scheme (IBM UK v Dalgleish EWHC 980 (Ch)). In February 2015, the High Court delivered a supplemental ruling as to what remedies should apply in respect of a breach of that duty (IBM UK v Dalgleish EWHC 389 (Ch)).
Background
IBM decided to make a range of changes to two of its defined benefit (DB) schemes between 2009 and 2011. This involved the employer exercising powers to cease the future accrual of benefits. It also involved the imposition of new early retirement terms and withholding pay rises from scheme members who did not agree to break the link between DB pension accrual and final salary. IBM applied to the Court for declaratory relief in relation to its changes to the pension schemes.
Imperial Tobacco duty of good faith
One of the main issues which the Court had to decide on was whether IBM had breached its contractual duty to its employees and its implied duty of good faith as set out in the landmark Imperial Tobacco case (Imperial Group Pension Trust Limited v Imperial Tobacco Limited 1 WLR 589). The Imperial Tobacco case established the principle that an employer cannot, without reasonable and proper cause, conduct itself in a manner likely to destroy or seriously damage the relationship of confidence and trust between the employer and employee. The Imperial Tobacco case thus established that there is an implied duty of good faith which is owed by an employer to an employee.
High Court decision
In the IBM case the High Court extended the principle and duty in the Imperial Tobacco case by holding that the employer’s obligation of good faith applies to the exercise of its rights and powers under its pension scheme. The Court held that scheme members had a reasonable expectation that the future accrual and early retirement benefits would continue unchanged and that pension increases would not be frozen, except where there was a change in the financial circumstances of the employer. The members’ expectations were based on the past conduct of IBM, which has made certain changes to the pension schemes in 2004 and 2006. It was further held that IBM’s business justifications were insufficient, that the employer did not exercise its discretion honestly, and that IBM had breached its duty of good faith and provided misleading information to members during a consultation process.
Remedies judgment
The Court subsequently held that the employer’s notice bringing an end to future accrual was voidable and could be set aside at the election of each member and that members were entitled to damages. The Court also held that members were entitled to damages for any loss arising from not receiving pension increases.
Comment
This case may be confined to its own particular facts. Nonetheless it demonstrates the need for employers to approach any pension scheme changes with due care. Employers also need to take into account any previous communication with members before implementing scheme changes, and they should also have a justifiable reason for making changes to a pension scheme. Employers should thus proceed with caution and take professional advice if planning to change pension scheme benefits.
This is not the end of this litigation saga as the case is being appealed and is expected to be heard by the UK Court of Appeal in April 2016.
Contributed by Michael Wolfe and Michael Keane
