The High Court (HC) decision in the remedies hearing in relation to the IBM Project Waltz case (the remedies judgment) was published on February 20, 2015, with Warren J deciding in favour of the scheme members.
IBM appealed both the remedies judgment and the 2014 HC judgment in IBM UK Holdings Ltd and another v Dalgleish and others (the liability judgment).
In a judgment handed down on August 3, 2017, the Court of Appeal (CA) dismissed the HC’s decision that IBM had not acted in good faith towards members when implementing the changes to its defined benefits (DB) scheme under Project Waltz. Neither did the CA find that IBM had breached its contractual duty of trust and confidence in making the scheme changes.
Disagreeing with many of Warren J’s conclusions, the CA nonetheless recognised that he had undertaken “a massive and unenviable task…in coping with the huge amount of....documentation…and evidence” and that “…his discussion of the nature and scope of the Imperial duty… [would] provide a valuable contribution to the development of the law in this respect”.
A brief reminder of the issues in the liability judgment
In the liability judgment, the HC held that when its actions between 2009 and 2011 were viewed as a whole, the Project Waltz changes amounted to a breach by IBM of both its Imperial duty of good faith and its implied contractual duty of trust and confidence towards its employees (the members of the scheme).
The members’ reasonable expectations were relevant. A reasonable expectation was the members’ expectation of what would happen in future generated by the employer’s own past actions, and which gave members a positive reason to believe that the scheme benefit structure would not be changed again.
Despite the breaches, the HC said that it did not necessarily follow that the Project Waltz changes were actually invalid, nor was anything said about actions the employer could take in the future.
What were the decisions reached in the remedies judgment?
In the remedies judgment,Warren J considered each element of Project Waltz in the context of both the Imperial duty of good faith and the implied contractual duty of trust and confidence. The conclusions he reached (in a bumper 187 page judgment) are summarised below:
- Non-pensionability agreements (NPAs) – the NPAs were signed by members and purported to make future salary increases non-pensionable. The HC held that the NPAs were unenforceable as they had been obtained in breach of contract. Members who had signed the NPAs were entitled to keep their salary increases and to have them treated as pensionable. In principle, these members could claim damages but this would be of little relevance to them, since their salary increases would now be considered pensionable and the majority of them would thus suffer no financial loss.
Those members who did not sign the NPAs, and therefore did not receive any salary increases, could not now claim the salary increases that were awarded to members who did sign the NPAs. Instead, such members would be entitled to damages to reflect:
- the salary increases they would have received, had IBM not implemented Project Waltz; and
- the loss of pension and other rights as a result of not having had such salary increases.
- Closure to future accrual – the exclusion notices, which sought to exclude active members from the IBM schemes with effect from April 1, 2011, were held to be voidable and capable of being set aside by members.
The HC rejected IBM’s argument that the notices should be assumed to take effect at some point in the future, when reasonable expectations had lapsed. Warren J held that, in order to terminate members’ pensionable service, IBM would need to issue new exclusion notices, which would have prospective effect only. In addition, injunctive relief would be granted to members if IBM issued such notices without conducting a further 60 day statutory consultation. Again, members would be entitled to damages.
- Early retirement policy – IBM had introduced a new, more stringent early retirement policy effective from April 6, 2010, which was designed to be cost neutral to the IBM schemes. Any retirement requests on terms that were more favourable than cost neutral would be considered “only in exceptional circumstances”. Warren J held that any member who, as a result of the new policy, had retired earlier than he otherwise would have, was entitled in principle to damages. IBM could not rely on the new policy in relation to members who would have enjoyed greater benefits under the old policy.
- Contractual duty of trust and confidence – members were found to be entitled to damages in respect of IBM’s breach of the implied contractual duty of trust and confidence which arose as a result of the way in which the consultation was conducted. However, Warren J concluded that it was doubtful this would give rise to any additional claim exceeding the other claims summarised above, as there was no additional loss.
The CA judgment
There were 40 issues presented to the CA, though four of these were not pursued. The live issues are set out in an Appendix to the CA’s judgment and the principal points are summarised below.
The CA noted that Warren J had reached his decision on the basis that members’ reasonable expectations (that the pension scheme benefit structure would not change in future) must be satisfied unless there was no other course of action open to the employer. The CA decided that the HC was wrong to conclude that IBM did not have a free hand to act as they chose in re-shaping the benefits under the scheme because of the members’ reasonable expectations. In the CA’s view, Warren J was wrong to conclude that IBM could have developed proposals to deliver its business objectives in other ways. The HC was wrong to decide that the members’ reasonable expectations prevented IBM:
- making salary increases on the basis they would be non-pensionable;
- closing the scheme to future accrual; or
- changing the early retirement policy.
Instead, the HC should have applied a rationality test, as formulated in Wednesbury, that relevant matters (and no irrelevant matters) should be taken into account and the resultant decision must not be one which no reasonable decision-maker could have reached. Warren J had failed to consider whether the members’ reasonable expectations had been overtaken by the changes in financial and economic circumstances resulting from the banking crisis of autumn 2008, which IBM could rationally have taken into account in making the benefit changes. Previous statements to members made by the employer regarding the stability and sustainability of scheme benefits for the “long term” did not in themselves give rise to reasonable expectations that DB accrual (and other pension benefit policies) would continue for the foreseeable future.
The Imperial and contractual duties
In considering the NPAs, the CA found that the HC had been wrong to conclude that the members’ agreement had been obtained in breach of the employer’s implied contractual duty of good faith. In the CA’s view, members had not signed them because of a “threat” that salary increases would be awarded on a non-pensionable basis only, and it was not a breach of IBM’s contractual duty for future increases to be non-pensionable. The CA found that the IBM case was not substantially distinguishable from Warren J’s own decision in Bradbury v BBC , where he had rejected the member’s argument that a cap on pensionable pay involved improper coercion (and the BBC decision has recently been upheld on appeal). The overall attack on Project Waltz had failed as the CA did not agree with Warren J’s finding that the members’ reasonable expectations prevented the benefit changes. It followed that the members’ separate attacks focussing on contractual duty could not then succeed.
The HC had also been wrong to hold that IBM had breached its Imperial duty of acting in good faith in giving members only a limited time in which to take advantage of the former, more favourable, early retirement policy. In addition, on the question of whether the defective consultation process (which had not complied with statutory requirements) meant that Project Waltz should not be implemented at all, the CA held that IBM should not be required to unravel and cancel the benefit changes.
The CA held that Project Waltz had been a proper and relevant exercise of the employer’s powers, although defects in the consultation process had resulted in breaches of both contractual and statutory duties by IBM. However, a new, compliant consultation would necessarily need to be about different proposed benefit changes which were appropriate for 2017. It was now impossible for members to be put back into the position they ought to have been in, had a proper consultation on the Project Waltz changes been undertaken in 2009. The CA refused to grant an injunction preventing IBM from going ahead with the implementation of the Project Waltz changes without a further consultation process, on the basis that the changes themselves were not unlawful. If the CA were to disallow the Project Waltz changes, IBM would have to consider and formulate entirely new proposals a long time after the relevant events. Even though IBM had breached its statutory duty in not complying with the consultation requirements, it would not be right to require the whole process to be undertaken again as the sanction for the past breach.
Having decided that the changes could go ahead, the CA acknowledged that the members’ damages for IBM’s breach of duty in respect of the conduct of the consultation would be difficult to assess. The members claimed that if IBM had given them accurate information in the consultation process, they would then have pursued an agreement for improved future pension provision. The CA noted that members would need to convince the Court, on the balance of probabilities, the extent to which they would have been better off if IBM had conducted a proper consultation.
It is difficult to imagine a more favourable outcome for IBM. The CA’s judgment is the end of the litigation road in this case, as the members have decided there is “little merit” in seeking an appeal to the Supreme Court.
Despite IBM’s success, the lengthy and costly litigation is a clear warning that employers must take their Imperial duty to act in good faith seriously. Communicating with members in an honest and open way when scheme changes are proposed offers a less troublesome route in effecting benefit changes. It is clearly preferable to ensure that any such exercises are conducted so that members do not feel the contractual duty of trust and confidence between the employer and its employees is adversely affected. The manner in which IBM carried out the consultation, and the heavy-handed way members were notified of future pay rises being on non-pensionable terms, was a breach of the statutory duty. However, the time lapse between the implementation of Project Waltz and the 2017 CA judgment, and the change in economic circumstances over that period worked in IBM’s favour. This resulted in the CA’s refusal to require the whole process to be revisited in order to punish IBM for the past breach.
In the time between the HC and CA judgments, reasonable expectations were considered in Thomson in July 2014. Here, the Deputy Pensions Ombudsman (DPO) held that alleged statements by an employer in 2002 that it intended to continue granting discretionary annual increases to pensions in payment did not by themselves create a “reasonable expectation” among affected members in relation to the employer's duty of good faith. The DPO’s decision was not binding, but the CA judgment in IBM has now confirmed that it was correct. The DPO also held that the employer had not breached its Imperial duty of good faith, as the decision to end increases in 2010 was not irrational or perverse but, instead, was based on valid financial grounds as its schemes had significant funding deficits. The CA has now stated that the two-limbed Wednesbury rationality-based test should be applied.
While the CA’s decision will be welcomed by scheme sponsors considering benefit changes as a means of addressing funding deficits, it remains the case that employers must consider consultations on pension scheme changes carefully. It is also essential that they allow themselves sufficient time to provide to members accurate and thorough advance communications of any intended changes so as not to fall foul of the statutory consultation requirements. It will be a huge relief to employers that members communications are not automatically legally binding and that members cannot use what the High Court termed “reasonable expectations” in benefit provision to unwind scheme changes.
View the judgment.