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Reasonable expectations - greater DB pension expectations for DB members

17 April 2014

Arising from the latest IBM judgment

A High Court judgement nearly as long and convoluted as a Dickens novel, at 435 pages, states that England's top pension judge, Mr Justice Warren, has unexpectedly extended DB members' pension rights. He did this by recognising that a series of statements provided by an employer, in this case, over a number of years, about their intentions as regards the company's DB pension plans can amount to the creation of a legal right - the right of Reasonable Expectations. Members can then enforce if the employer subsequently reneges on those statements.

The facts

In this case, IBM led its members to believe that if its DB plans were restructured in various ways over a number of years to reduce pension costs then, their pension arrangements would be "secure", "sustainable" and "long term", but, there was no actual commitment from IBM that the plans would not close to future accrual. The 2007 financial crash (and its consequences), however, intervened and had an adverse impact on IBM, ultimately leading IBM to change its approach to its UK pension provision.

The judge decided that IBM's earlier non-binding pension statements were sufficient to give members a new right of Reasonable Expectations which could be enforced, despite the change in IBM's circumstances from when those earlier statements had been given. In reaching this decision, the judge seems, despite his protestations, to be micro managing IBM's global business so he, for example, suggests that IBM could have implemented different cost saving proposals a few of which he puts forward.

What are Reasonable Expectations?

Reasonable expectations are a new right created under pensions/trust law (not employment law). They derive from an extension of the well-established Imperial duty of good faith as regards the ownership of pension plan surpluses in the 1990s. The Imperial duty of good faith required a plan's sponsoring employer to consider the impact of its decision on the plan's members when exercising its powers under the plan's trust deed and rules.

However it also allowed the employer to prefer its own interests, including its financial interests. This was always a fairly weak obligation. For this reason, for IBM's particular set of circumstances, the judge had to expand the Imperial duty to the new duty of Reasonable Expectations to give the members access to a remedy that they would not otherwise have. Reasonable Expectations is separate to any claim and remedy which employees may also have under employment law for breach of an employer's duty of mutual faith and confidence - breach of this leads to a contractual claim.

For an employer to be in breach of the members' Reasonable Expectations, it must act perversely, irrationally and in a way no reasonable employer would. Having a good business case did not act as a silver bullet.

How relevant is the case?

Very! This case is of relevance to all employers and trustees when implementing pension changes. It may even require an analysis of how previous pension changes have been implemented.

Comment on IBM's conduct

As a UK pension professional unconnected with the case, it is quite hard to see how IBM, by wanting to close its UK DB plans to future accrual, is acting perversely, irrationally and in a way no reasonable employer would, given the number of employers who have now closed their plans to future accrual. It also seems rather to contradict recent statutory developments that recognise that affordability of DB plans is a key issue for employers.
However, perhaps the difference is that IBM wanted to push through this change at any cost. What stands out from the IBM case is that the UK pension changes were effectively railroaded through by the US parent company, with little understanding or recognition of the UK employer's legal position. This meant the UK employer felt it was forced to implement the changes required by the US regardless of its legal obligations.

What also stands out is the judge's view that by implementing the pension changes, IBM was in breach of its own core values of openness, honesty and integrity. These extra details are why we think the judge was willing to push the boundaries of English law and create the new enforceable right of Reasonable Expectations.

However what the judge didn't decide is what remedies flow from this new right. This will be considered by the same judge later this year. If the remedy is for IBM to go through, for example, a further consultation exercise then this may be acceptable to IBM, given the huge cost of this litigation, but, IBM has already lodged its application for appeal to safeguard its position. IBM may also want to bring the appeal to try and undo some of the damage this has caused its reputation.

Other IBM breaches

The judge also found the UK failed to properly consult with its employees over the pension changes. There was no real consultation as the employer's mind was already made up before the consultation. In addition to this, the UK employer was also in breach of its employment law duty of mutual faith and confidence. It was willing to 'coerce' those members who didn't agree to the freezure by effectively saying that these individuals would never receive a pay rise and so their pensionable pay would be capped.

It is also worth noting the freezure wasn't effected by a standard deed of amendment but through an 'exclusion clause', excluding the active members from being active members of the plan but the judge decided this approach worked.

For more information, please contact Michael Jones on +44 (0)20 7203 8917 or michael.jones@crsblaw.com