Court of Appeal overturns landmark IBM judgment
The Court of Appeal has delivered its ruling overruling the High Court judgment of the IBM court case revolving around whether the company had acted in good faith when making changes to the pension scheme.
The 2014 High Court judgment in the case of IBM v Dalgleish (see Pensions Bulletin 2014/15) has had significant impact on employers in the process of closing their pension schemes or making other pension changes. The subsequent “remedies judgment” (see Pensions Bulletin 2015/09) imposed draconian remedies on the employer.
To recap, following on from previous pension scheme changes, in 2009 IBM sought to close its DB schemes to future accrual, make future pay rises non-pensionable and introduce a more restrictive early retirement policy.
The pension scheme trustees and representative beneficiaries sued, claiming that IBM had breached its implied contractual duty of trust and confidence (sometimes known as the “Imperial duty” after the eponymous 1990s court case).
The High Court judge largely ruled in the trustees’ and beneficiaries’ favour. Crucially, he decided that relevant employees had “Reasonable Expectations” created by employer communications during previous pension change exercises as to DB accrual and early retirement policy such that the pension changes could not be justified, unless there was no other way of achieving the company’s legitimate business aims.
IBM appealed and the Court of Appeal has now upheld this appeal, overturning the previous judgment. 40 issues were identified on appeal. We briefly look at some key ones below.
Did the High Court correctly decide regarding the breach of the Imperial duty?
No. The judge erred in law about Reasonable Expectations. The correct approach is to apply a rationality test (a “Wednesbury” test in legal parlance) in order to decide whether a decision by a decision-maker such as an employer is valid and lawful having regard to the Imperial duty. This would normally come in two parts. Firstly had any irrelevant matter been taken into account, or any relevant matter left out? Secondly was the decision one that no rational decision-maker could have reached?
As it had not been argued that relevant factors had been disregarded and irrelevant ones taken into account, had IBM acted rationally? It had. The existence of “Reasonable Expectations” or not was only one relevant factor.
It follows that the High Court was wrong to hold that IBM was in breach of the Imperial duty in implementing the pension changes.
Was the High Court correct to rule that IBM’s business case was inadequate?
No. The High Court had ruled that the employer’s business case was inadequate to justify the pension changes because it would disappoint the Reasonable Expectations. Too much weight had been given to the Reasonable Expectations. Moreover, it is not the job of the Court to substitute itself for an employer in making commercial decisions.
Had IBM been “disingenuous”?
The High Court judge’s finding that IBM had been disingenuous (which would go straight to the heart of “good faith”) could not be supported. Indeed, to so find without appropriate pleadings by the relevant witnesses was a serious procedural irregularity. It follows that IBM’s conduct as described could not (even if it would otherwise do so) count for the purpose of determining whether the employer had breached its Imperial duty.
What consequences does the inadequate consultation have?
The High Court had found (and this was not appealed) that the consultation process undergone was seriously flawed, so much so as to constitute a breach of the Imperial duty in itself. The consequences of these flaws were not spelled out so in the event the Court of Appeal was left to decide on this. It decided not to order IBM to carry out a new consultation before the pension changes can be implemented. The appropriate remedy would be for the members to claim for damages under the employment contract (and regulatory action by the Pensions Regulator for a breach of the employer consultation regulations is not precluded).
Comment
Employers closing their pension schemes have had to pay close attention to the 2014 IBM ruling in their procedures and communications since then. While it does seem that the High Court placed too much weight on the idea of “Reasonable Expectations” employers must still be concerned to abide by their duty of confidence and good faith when planning closures or other pension changes.
It will still be vital to ensure that communications are clear, consistent with things said in the past and compliant with legislation (even though we now have a strong authority that defective consultations will not have to be re-run).
At the time of writing it is not clear whether the case will be appealed to the Supreme Court although there have been media reports that the representatives of the IBM scheme have decided not to do so. And, of course all of this is very dependent on the particulars involved in this dispute. It hardly needs stating that in slightly different circumstances a court might reach a different conclusion.
FCA publishes asset management market remedies timeline
The FCA has produced a helpful timeline showing the progress it intends to make with the asset management “remedies” identified in its asset management market study, concluded in June (see Pensions Bulletin 2017/27).
The timeline shows:
- The intended publication of a policy statement - this will have regulatory force - in March/April 2018 on the remedies to give protection to investors who are less able to find better value for money. This will cover investment governance issues and will also aim to make it easier for investors to switch to cheaper share classes
- The policy statement could also require fund managers to return risk-free “box profits” and disclose how they are managed. Box profits are made when there are buyers and sellers of units in a fund with a bid/offer spread at the same time – the buyers and sellers are charged the spread but as there is no need to change the underlying investments the transaction costs are not incurred, and the asset manager can simply take the spread as profit
- The intended publication of a further consultation paper in March/April 2018 which will cover how benchmarks are used, how performance is reported, changes to make objectives clearer and more useful and, if required, single all-in fee remedies
- A working group on supporting consistent and standardised institutional disclosure meeting between September and December 2017 to agree mainstream asset management disclosure and beyond that to agree alternative disclosures
- The next steps for a provisional market investigation reference on investment consulting to be published in September 2017
Comment
The timeline is a handy at-a-glance document for those affected by this project.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
