IBM V Dalgleish

Recap of the facts

During the period between 2004 to 2009, IBM proposed and implemented a number of changes to its defined benefit pension schemes. The final project, which took place in 2009, was known as Project Waltz. 

Project Waltz involved closing the defined benefit pension schemes to accrual through the use of "non-pensionability agreements" to ensure that future pay increases would not be included in employees' defined benefit pension calculations.  Project Waltz also involved changing early retirement policies in the schemes to further reduce costs. 

Prior to Project Waltz, IBM had made certain promises and statements to employees in relation to its intentions regarding the future continuation of defined benefit accrual.  

The trustees of the defined benefit schemes doubted the lawfulness of the changes proposed in Project Waltz and sought the court's approval before agreeing to implement these changes. 

The original judgment considered historic promises and employee communications made by IBM, along with internal codes of conduct and staff handbooks. The court found that, taken together, these materials had given employees reasonable expectations that the defined benefit schemes would remain open to accrual. As such, the court held that the changes proposed in Project Waltz amounted to a breach of IBM's duty of good faith towards its employees.

IBM has successfully appealed the original judgment, which means that it can now implement the changes envisaged by Project Waltz. 

The court of appeal judgment will provide great comfort for many employers when considering benefit change and scheme closure projects.

However, while IBM has ultimately been successful on appeal, its conduct in approaching Project Waltz was not without criticism. This case has highlighted key areas for consideration by both scheme employers and trustees when approaching benefit change projects.

Managing employees' expectations

The original judgment considered, at length, the employer's duty of good faith towards employees. In particular, much consideration was given to past communications to members regarding previous scheme change projects, along with IBM's internal code of conduct.

The original judgment held that, where promises had been made regarding pensions in historic communications, it would be a breach of an employer's duty of good faith to break such promises. This effectively elevated the weight placed on past member communications when considering the factors relevant to maintaining a pension scheme which is open to accrual. 

The court of appeal has overturned this approach and held that, while historic communications should be taken into account, they should not be given prominence over other relevant factors, including employees' contractual entitlements, the costs associated with running a scheme, and wider business needs.  Employers' discretionary decisions should not be overturned unless the employer can be shown to have acted perversely or irrationally.

This aspect of the court of appeal's judgment is helpful in clarifying the position for both employers and trustees, many of whom, following the original decision, have been wary about embarking on benefit change exercises or projects to cease accrual, because of the content of historic member communications. 

The clarity provided by this decision should allow employers and trustees to take a sensible and pragmatic approach when weighing up members' reasonable expectations in the context of a benefit change or scheme closure exercise. 

Consulting with affected employees

The original judgment heavily criticised IBM's approach to consultation.  These criticisms were not subject to appeal. However, the court of appeal did appear to endorse the criticisms made in the original judgment. 

The court of appeal stopped short of requiring IBM to carry out a further consultation before implementing the changes proposed by Project Waltz. However, there is some suggestion in the judgment that the court's decision owed more to procedural failings on the part of the representative beneficiaries than to the court considering that the consultation had been carried out appropriately.

Employers planning to consult on scheme changes should, in our view, do so in light of the IBM decision, which highlighted the following key points:

Consultation must be in good faith

Employers must provide genuine reasons for a proposed change. They must not omit key reasons for proposed changes in consultation documents, as this risks misrepresenting the reasons for the change.  

Consultation must be with an open mind

Employers should set out a genuine opening position (being a position that, subject to the outcome of the consultation, it intends to implement) and be prepared to adapt that position in response to feedback received from the consultation.

In Project Waltz, IBM's internal communications indicated that IBM intended to change the offering at certain points during the consultation and had effectively "mapped out" the consultation process including the final outcome before consultation had begun.  IBM were criticised for this approach, as it could not be said that they had consulted in good faith and with an open mind.

Areas of consultation should be clearly identified

The law only requires employers to consult on specific changes to pension benefits.  

The court held that, once a matter has been included in a consultation, the employer is required to treat that matter as forming part of the consultation and therefore will be bound by the law governing consultation.

Non-pensionability agreements

The court of appeal decided that employers are entitled to agree with employees that future pay increases will be awarded on the basis that they are not pensionable, and that IBM's decision to ask employees to enter into such agreements was not perverse or irrational.