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Employers Beware: The Member Strikes Back

Employers Beware: The Member Strikes Back

Employers Beware: The Member Strikes Back 
A recent decision of the High Court in England has provided disappointed pension scheme members with hope that they may be able to strike back against the loss of valuable benefits when an employer decides to make changes to existing pension arrangements.  
The Court ruled that IBM UK had breached the duty of trust and confidence it owed to its employees (otherwise known as the duty of good faith) when it closed its defined benefit (DB) pension schemes to future accrual of benefits.  The lengthy judgement (at nearly 400 pages - not for the fainthearted!) provides a timely reminder to employers of the duties they owe to employees who are scheme members when considering changes to pension arrangements.
The IBM case is the first reported case relating to pension scheme changes where an employer has been held to be in breach of the duty of good faith.  Such claims have failed in the past because, in considering that duty, an employer can have regard to its own interests.  Even where an employer has acted in an (arguably) unreasonable manner, it would not be considered to have destroyed the relationship of trust and confidence between employer and employee where it could demonstrate that the relevant decision had been taken to protect its own interests.
At first sight, this decision could be seen to be a reversal of judicial attitudes towards employers exercising their legitimate powers in relation to pension schemes.  However, a closer reading of the judgement reveals that IBM breached its duty of good faith only because of previous assurances given to employees that they would continue to build up benefits in the DB schemes.  It is a stark lesson to employers that when considering making changes to pension schemes they should carefully consider not only how they communicate those changes to members, but also whether their past conduct and /or promises made means that scheme members have a reasonable expectation that such changes will not be made. 
Members’ reasonable expectations were the key to this decision. The test for whether or not the duty of good faith has been breached is severe: it is one of irrationality and perversity, in the sense that no reasonable employer could act in the way that IBM had acted.  Previous conduct and communication from IBM had created a reasonable expectation that members would continue to build up DB pension benefits.
Recent analysis shows that 84% of DB schemes are closed to future accrual of benefits.  And there is an ever increasing focus on whether the current defined contribution environment can provide decent outcomes for pension savers.  This decision provides a small crumb of comfort to pension scheme members that they may be able to successfully challenge an employer who is seeking to close off their access to certain (better) benefits, if they have in the past been led to believe that that those benefits would continue in their existing form.  Where an employer has otherwise followed the correct procedures in implementing a scheme closure, it is practically the only way that such a closure can be attacked by members. 

A recent decision of the High Court in England has provided disappointed pension scheme members with hope that they may be able to strike back against the loss of valuable benefits when an employer decides to make changes to existing pension arrangements.  

The Court ruled that IBM UK had breached the duty of trust and confidence it owed to its employees (otherwise known as the duty of good faith) when it closed its defined benefit (DB) pension schemes to future accrual of benefits.  The lengthy judgement (at nearly 400 pages - not for the fainthearted!) provides a timely reminder to employers of the duties they owe to employees who are scheme members when considering changes to pension arrangements.

The IBM case is the first reported case relating to pension scheme changes where an employer has been held to be in breach of the duty of good faith.  Such claims have failed in the past because, in considering that duty, an employer can have regard to its own interests.  Even where an employer has acted in an (arguably) unreasonable manner, it would not be considered to have destroyed the relationship of trust and confidence between employer and employee where it could demonstrate that the relevant decision had been taken to protect its own interests.

At first sight, this decision could be seen to be a reversal of judicial attitudes towards employers exercising their legitimate powers in relation to pension schemes.  However, a closer reading of the judgement reveals that IBM breached its duty of good faith only because of previous assurances given to employees that they would continue to build up benefits in the DB schemes.  It is a stark lesson to employers that when considering making changes to pension schemes they should carefully consider not only how they communicate those changes to members, but also whether their past conduct and /or promises made means that scheme members have a reasonable expectation that such changes will not be made. 

Members’ reasonable expectations were the key to this decision. The test for whether or not the duty of good faith has been breached is severe: it is one of irrationality and perversity, in the sense that no reasonable employer could act in the way that IBM had acted.  Previous conduct and communication from IBM had created a reasonable expectation that members would continue to build up DB pension benefits.

Recent analysis shows that 84% of DB schemes are closed to future accrual of benefits.  And there is an ever increasing focus on whether the current defined contribution environment can provide decent outcomes for pension savers.  This decision provides a small crumb of comfort to pension scheme members that they may be able to successfully challenge an employer who is seeking to close off their access to certain (better) benefits, if they have in the past been led to believe that that those benefits would continue in their existing form.  Where an employer has otherwise followed the correct procedures in implementing a scheme closure, it is practically the only way that such a closure can be attacked by members. 

Deborah Adams
Director

Burness admin