Pensions panic opens old wounds

On 4 April 2014, the High Court in
IBM UK Holdings v Dalgleish and others [2014] EWHC 980 (Ch) was asked to consider whether IBM’s defined benefit scheme
closures were lawful and whether they were implemented in breach of the duty of good
faith and the contractual duty of trust
and confidence.

The facts in this case cover events from over
ten years ago, from 2004 to 2011, in respect of
two defined benefit schemes and various benefit structures which affected thousands of members. The most crucial changes were implemented under the company’s ‘Project Waltz’ in 2011.
In summary, IBM:

• Closed two of its defined benefit schemes to future accrual and sent scheme members notice of the same;
• Added new early retirement terms ending enhanced early retirements (with early retirement now only being allowed on cost-neutral terms); and
• Withheld pay increases for affected defined benefit members who did not agree to break the link between final salary and pension accrual. Scheme members were asked to sign non-pensionability agreements (NPAs) which in effect varied the contract of employment and made salary increases non-pensionable.

The scheme members were dissatisfied with
the changes and argued they had reasonable expectations about the future of the pension schemes because IBM had actually confirmed
that the changes being made would put the defined benefit plans on a more ‘long-term’ footing. They further argued that IBM had implemented these changes because its US parent company wanted to improve its position for accounting purposes and meet the targets promised to Wall Street in relation to earnings
per share.

Breach of duty

In the judgment, which runs some 435 pages,
Mr Justice Warren held that, as a whole, changes made by IBM to its pension schemes gave rise to a breach of both its duty of good faith in a pensions context and of its contractual duty of trust and confidence.

IBM was in breach of the contractual duty of trust and confidence in stating that pay increases would be withheld from members who did not agree to sign the NPAs.

IBM had provided misleading information to the scheme members during the consultation process in relation to the closure of the schemes. The notices issued in relation to future accrual were held to be inconsistent with the members’ reasonable expectation that defined benefits would continue.

Remedies hearing

A further hearing took place in July 2014 with regards to the remedies to be provided in relation to IBM’s breach of its duty of good faith and contractual duty of trust and confidence.
The remedies judgment was handed down
by Warren J on 20 February 2015.

It was held that for scheme members who
had entered into the NPAs, the terms could not
be enforced by IBM. Accordingly, these scheme members were entitled to keep all of the salary increases awarded and continue to be paid salary incorporating those increases, which were to be treated as pensionable.

Although it was held that members could claim damages for entering into the NPAs, in practice most scheme members could claim their salary increases were pensionable, and therefore most scheme members would not have suffered any financial loss.

On the other hand, scheme members who did not receive salary increases because they did not sign the NPAs could claim damages for the salary loss and loss of pension and other rights resulting from the salary increases they would have received had Project Waltz not been implemented.

It was further held that the notices issued by IBM in relation to closing the scheme to future accrual were voidable in their entirety. Scheme members were entitled to damages and compensation as a result of serving the notice. Scheme members could choose to set aside the notice and be treated as remaining in pensionable service, and therefore accrue benefits under the scheme (unless they had since left employment). The scheme members were also entitled to have their defined contribution benefits transferred to the defined benefit scheme.

IBM’s argument that the notices should
take effect from a future date when reasonable expectations had lapsed was dismissed. If IBM still wished to close the scheme to future accrual, it would need to serve a new notice with prospective effect and carry out a 60-day consultation process. Warren J warned that if IBM served further notices
to close the scheme without undertaking a proper consultation in accordance with the statutory pension consultation regulations, the court
might grant injunctive relief to prevent the same.

In relation to the early retirement policy,
IBM could not rely on the new policy of early retirement, which was less favourable than
the former enhanced early retirement policy. Accordingly, any scheme member who, as a result
of the new policy, retired earlier than they would otherwise have done was entitled to benefits under the old policy and would be entitled to damages for breach of contract or compensation in relation to IBM’s breach of its duty of good faith.

It should be noted that some scheme members had already brought claims in the employment tribunal for financial losses suffered, including loss of earnings and defined benefit pension accrual.

Undecided issues

Although the remedies judgment was quite substantial, there were a few matters which
were left undecided, in particular:

• When scheme members would be permitted to set aside the notices;
• If the parties could not agree on how defined contribution benefits (for members who chose to set aside the notices) would be unwound, the court would have to issue directions;
• The measure of damages for breach of the duty of good faith for the service of the notices and the implementation of the new early retirement policy;
• Consideration of exemplary damages and compensation for breach of the contractual duty of trust and confidence;
• The wrong IBM corporate entity named in relation to the various breaches; and
• Whether there were age discrimination issues in giving defined contribution members pay increases and not defined benefit members who rejected the NPAs (and who were generally older) and were therefore put at a disadvantage.

Practical considerations

This case was particularly fact specific, and
therefore all benefit changes and defined benefit scheme closures will not necessarily be in breach
of the employer’s duty of good faith and the contractual duty of trust and confidence.
This case does, however, highlight the need for employers to think very carefully when planning and implementing changes to their defined benefit pension schemes.

When preparing member communications, careful thought needs to be given to the impression that this piece of communication
will give to scheme members. Employers need to ensure that it does not mislead or inadvertently create any reasonable expectations about the future of the pension schemes.

The employer should properly consider a
business case for any proposed scheme closures
or benefit changes. Employers should also be clear and transparent with the trustees, who may seek further assurances for comfort.

Moreover, if the parent company is based internationally, the UK business will need to scrutinise the justification for the proposed change and cannot merely hide behind the parent company’s instructions. Internal communications will also need to be reviewed in relation to the business rationale for the proposed changes,
so that the authenticity and reasonableness of
the pension consultation process is not called
into question.

The need for a genuine and proper consultation process also means the employer should not rush the process and should be willing to address the responses to the consultation, re-consider their position where necessary, and not make any decisions prior to the expiry of the consultation process.

The final word?

IBM is seeking leave to appeal the decisions in both the main judgment and the remedies judgment,
so although this is current law, a successful appeal may reverse some of the findings and may also address some of the issues which were not
decided upon.

The parties have agreed to a delay in the implementation of the remedies judgment until such time as the appeal proceedings are resolved,
so we will have to sit tight for more developments in this area…with plasters at the ready as old wounds are reopened! SJ

Dilini Loku is a solicitor at Silverman Sherliker