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IBM breach of pension duty ruling does not undermine all other past DB scheme closures, says expert

A recent court decision against the way in which technology company IBM went about restructuring its pension arrangements for UK employees does not call into question the validity of all other past or future defined benefit (DB) pension scheme closures, an expert has said.10 Apr 2014

Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that the High Court's decision in IBM's case turned on "a number of specific facts". In a lengthy judgment, Mr Justice Warren found that IBM had acted in breach of its duty of good faith to the members of its DB pension schemes when it closed them to future accrual, due to the scheme members' "reasonable expectations" of IBM in light of its previous conduct.

"Member communications had raised specific expectations that the two pension schemes would remain open for a certain time, and members relied on those communications in choosing benefit options," he said. "The American parent company had shareholder targets that drove the scheme closures. IBM in the UK should not have sought to shelter behind decisions made in the US - it needed its own business case for closure, and it needed to take into account scheme members' expectations."

"Most employers that have closed DB schemes are likely to have acted properly - by establishing a sound business case, communicating properly with scheme members and taking into account their expectations. Trustees and employers who are concerned about the validity of past or future scheme closures should talk to their legal advisers – this case may encourage members to challenge what their employers have done," he said.

Tyler added that the High Court's judgment was unlikely to be the final word in the case. IBM has announced that it intends to appeal.

DB schemes promise a set level of pension once an employee reaches retirement age, no matter what happens to the stock market or the value of the pension investment. The percentage of open schemes has more than halved since 2007 and these now tend to only be offered by large companies, as employers struggle to cope with the costs of providing pensions for longer against poor investment results.

In its 435-page judgment, the court considered the legality of IBM's 'Project Waltz' initiative, under which the company's two UK DB schemes were closed to future accrual as of April 2010. As part of the project, members of the IBM Main Plan and IBM IT Solutions Pensions Scheme also had to agree to future pay increases being non-pensionable, and to a new early retirement policy under which IBM would largely stop consenting to enhanced early retirement. Approximately 5,000 scheme members affected by the changes were notified in July 2009.

In his judgement, Mr Justice Warren said that IBM breached its contractual duty of 'trust and confidence' to the scheme members in relation to the way that the consultation on the changes was carried out; as well as its duty of good faith, known as its 'Imperial duty' after a previous case, in relation to some of the changes themselves. On the second point, he said that the test for whether the duty had been breached was one of "irrationality and perversity", in the sense that "no reasonable employer" could have acted in that way.

"The Project Waltz changes were, on any view, very significant and clearly capable of giving rise to a breach of [IBM's] Imperial duty and of its contractual duty of trust and confidence," he said. "[Communications with the pension scheme members] were not simply statements and communications; they were intended to be, and were, acted upon by the members in making the choices which they did."

The judge rejected an argument from IBM that the wishes of its US parent company should be taken into account when assessing whether it had breached its duties to the scheme members. He said that it was "not possible" for the UK company "to shelter behind a business case based on the need to meet targets imposed by [the parent company] unless, in turn, a business case can be demonstrated justifying the imposition of the targets."

Remedies for the breaches will be considered by the court at a later date, and would not necessarily result in the changes being "swept away", the judge said.