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18 August 2017

Project Waltz – the last (and only) waltz for Reasonable Expectations?

Reasonable Expectations are no more. In IBM and Dalgleish the Court of Appeal overturned the High Court decision which established the principle of Reasonable Expectations and found in favour of IBM.  It held that the High Court had applied the wrong test to determine whether there had been a breach of duty or not. The correct test is one of reasonableness. Expectations are simply one element to be taken into account.

In 2009 IBM endeavoured to embarked on a series of changes to its pension schemes, known as Project Waltz.  The key elements of the project were:

  • the closure of its defined benefit schemes to future accrual, to be achieved by excluding employees from membership of the schemes
  • to make future pay rises non-pensionable, to be achieved by varying employees employment contracts through a non-pensionability agreement
  • to introduce a more restrictive early retirement policy, designed to be cost neutral.

IBM’s main driver behind Project Waltz were to reduce costs. There had been two previous sets of changes to the pension schemes, Project Ocean and Project Soto also intended to reduce costs. Project Soto involved offering members a choice between retaining defined benefit pension accrual on the basis that only two thirds of any future salary increases would be pensionable and transferring to a new defined contribution section. If members opted to join the DC section, future benefit accrual would be on a DC basis but members would retain a link to their final salary in respect of the calculation of their defined benefit pensions.

Perhaps not surprisingly, the announcement of the Project Waltz proposals did not go down well with members and the Trustees refused to introduce them without a court declaration that the changes were legally valid. Ultimately this resulted in a trial lasting 30 days. In April 2014 Warren J handed down the judgement of the High Court.  The Court held that in trying to implement the Project Waltz proposals, IBM had acted in breach of its Imperial Duty (named after the Imperial Tobacco case in 1991) and in breach of the implied contractual duty of good faith. Statements made by IBM during the earlier projects were held to give rise to Reasonable Expectations (as opposed to mere expectations) on the part of members that defined benefit accrual would continue and that two thirds of salary increases would be pensionable. 

In addition, IBM’s consultation process with members was defective.

However, in its judgment the Court of Appeal overturned the High Court’s decision. It held that though an element to be taken into account, members’ expectations had been given a pre-eminence which was not justified. The correct test in such circumstances was one of rationality or Wednesbury reasonableness (ie the principles set out in the case of Associated Provincial Picture Houses v Wednesbury Corpn 1948).  It is necessary to consider whether all relevant factors had been taken into account and no irrelevant factors had been considered. In forming its decision, the Court must not substitute its own view for that of the decision maker (assuming the decision is one which a reasonable employer could have made). The Court of Appeal was strongly influenced by the 2015 Supreme Court ruling in Braganaza v BP Shipping Ltd.(This case involved a death in service benefit under a contract of employment, which was not payable if the cause of death was suicide and the exercise of the employer’s discretion in such circumstances.) 

The Court of Appeal stated that the High Court had:

“accorded an overriding substantive significance to Reasonable Expectations such that they could only be lawfully disappointed in a case of necessity, which is not compatible with the correct approach…. Members’ expectations…… do not constitute more than one relevant factor which the decision maker can, and where appropriate should, take into account in the course if its decision making process.” (Sir Timothy Lloyd)

But employers beware – do not be tempted to thinks that the orchestra has packed up, the waltz has come to an end and the music of Reasonable Expectations is over.  There is still a softer but perhaps no less important tune playing in the background. Though the key principles of the High court ruling have been over-turned, many of the High Court’s findings were not challenged on appeal.  Of particular relevance for employers and trustees were Warren J’s comments about the proper conduct of statutory consultation exercises. Employers in particular should take care not to fall into the pot holes identified by Warren J in IBM’s consultation process.  

For example, employers should be aware of the need to be clear about the main drivers for change and of the need to approach the consultation exercise with an open mind. The Court of Appeal did not rule that IBM should carry out a fresh consultation exercise (partly because of the passage of time) but did state that members are entitled to claim for damages.  Had a remedy been sought more rapidly, injunctive relief stopping the implementation of the changes may well have been available.

This article was written by Esther White. For more information please contact Esther on +44 (0)20 7203 5271 or at