The High Court when it heard the dispute in April 2014 held that IBM acted in breach of its duty of good faith to the members when it closed two of its defined benefit pension schemes to future accrual of pension benefits in 2010.
An important basis for the decision was that the members had formed “reasonable expectations” that the schemes would remain open to pension accrual for longer based on IBM’s conduct and representations made to employees.
The pension changes in 2010 were called “Project Waltz” and took place after two other scheme restructuring exercises. The High Court decided in relation to the Project Waltz changes that IBM was in breach of what has been called the “Imperial” duty of good faith (which is based on a previous UK case) as mentioned above and also that IBM was in breach of its contractual duty of “trust and confidence” to the members in relation to the way the conduct of the consultation process on the changes. The High Court Judge indicated that the relevant test was whether the IBM had acted reasonably and appropriately.
The Court of Appeal has held that the appropriate test which should have been applied by the High Court in 2010 was whether any rational employer would have acted in the way IBM did in relation to the Project Waltz changes. The Court of Appeal decided that the “reasonable expectations” factors were relevant factors to be taken into account by IBM in agreeing to the Project Waltz changes. However, the High Court should not have elevated the “reasonable expectations” points as overriding factors in reaching its decision in 2010. This had the effect of diluting the true test of rationality which was the relevant test to apply.
The Court of Appeal also rules that the High Court should not have ordered IBM to carry out a new consultation process in relation to the defective consultation process in 2010 leading to the Project Waltz changes. Instead, the Court of Appeal ruled that the correct approach was to allow the trustees to claim damages for breach of the contractual process.
This ruling of the Court of Appeal brings some common sense back to pensions and should make future pension closure projects more streamlined.
The Court of Appeal has also upheld an earlier High Court judgment in the case of Bradbury v BBC that in deciding to award a pay rise where it is conditional that only part of is to be recognised as pensionable was not in breach of the scheme rules and that when making this decision, in the context of the employer’s economic circumstances, the BBC had not breached its ‘Imperial duty’, i.e. the duty to act in good faith. The BBC had proposed, because of the significant escalation in the costs of providing the final salary benefits for Mr Bradbury and other members in the same section of the BBC scheme, that only the first 1% of any pay rise would be recognised in calculating the benefits under the scheme.