The UK Court of Appeal case of IBM United Kingdom Holdings Ltd and another v Dalgleish and others EWCA Civ 1212 (the “IBM case”) clarifies the scope of the Imperial duty of good faith. That duty created a limitation on an employer’s exercise of a non-fiduciary discretionary power in respect of their pension scheme. This is the first case at appellate level in which the Imperial duty of good faith has been considered and it may be significant for Irish employers who are considering making changes to their pension schemes.  The UK Court of Appeal took a more employer friendly approach than the UK High Court by reducing the importance of the expectations of pension scheme members and demonstrates a movement towards a test of the rational employer.  

Background 

The Imperial duty of good faith (Imperial Group Pension Trust Limited v Imperial Tobacco Limited 1 WLR 589) created an obligation on an employer not (without a reasonable and proper cause) to conduct itself in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between employer and employee.  The IBM case considered pension changes sought to be implemented in 2009 by IBM to its defined benefit (DB) schemes in Project Waltz.  There had been two previous projects in 2004 and 2005 by which IBM had altered pension benefits under the DB schemes.  Project Ocean in 2004 had resulted in

1. an increase to the employee’s contribution rate,
2. a commitment from IBM to pay towards reducing the deficit in the schemes, and
3. a parent company guarantee to fund liabilities until 2014.  

Project Soto in 2004-2005 offered members a choice to either

1. remain in the DB schemes, accruing benefits, subject to agreements which would result in only two-thirds of future salary increases being pensionable, or
2. transfer to a new defined contribution (DC) section with enhanced DC benefits for future service from July 2006 but retain final salary-linking in respect of past service DB benefits.

Then in 2009, Project Waltz sought to include the following proposals:

1. to cease future accrual from 2011;
2. for a new early retirement policy from 2010 (with less advantageous terms);
3. an early retirement window for active members to retire early;
4. for pay increases from 2009 onwards to be non-pensionable; and
5. to allow former active members of the DB schemes to enter into the DC section.  

Reasonable expectation

A central basis of the earlier decision of the UK High Court was its view of the expectations created for active members by communications made by IBM to them during 2004 and 2005 (for example a webcast during Project Ocean in which reference was made to IBM’s commitment to the DB schemes). The UK Court of Appeal criticised the weight that the High Court had given to the members’ reasonable expectations arising from those circumstances.  The Court of Appeal held that the High Court had wrongly elevated reasonable expectations to a status in which they had overriding significance over other relevant factors. 

Rationality

The Court in IBM decided that the Wednesbury test (applicable in judicial review cases) should apply in deciding whether the constraints imposed by the Imperial duty have been respected. The Court relied on the Supreme Court employment case of Braganza v BP Shipping Ltd UKSC 17 which applied the Wednesbury test to a case assessing the exercise of a discretion of an employer under an employment contract.  The Wednesbury test assesses if: 

• the relevant matters (and no irrelevant matters) have been taken into account; and
• the result is such that no reasonable decision-maker could have reached it.

Additionally the UK Court of Appeal criticised the reference to a reasonable employer which they viewed as a test diluted from the test of irrationality. They suggested it might have been more helpful to refer to a rational employer.  The UK Court of Appeal concluded that the High Court judge decided there would have been adequate business justification for Project Waltz, but for, the reasonable expectations of the members.  Project Waltz could therefore proceed.

Comment

The Court of Appeal displayed an appreciation of the realities of business. It commented that it was not for them “to retake a commercial decision previously adopted by a commercial entity. Nor should the Court assess the legitimacy of IBM UK’s actions with the wisdom of hindsight.” It has been reported that this case will not be appealed to the Supreme Court.  Employers operating pension schemes will welcome the fact that reasonable expectations won’t necessarily be a show-stopper for pensions restructuring.  However if an employer creates an expectation to members in its communications to them, this will still be a relevant factor for assessment in an examination of rationality.  Employers should tread carefully and seek professional advice before planning changes to their pension schemes. 

Contributed by Jane Barrett & Ciara McLoughlin. 

Follow us on @WFEmploymentLaw @WilliamFryLaw

Back to Legal News.