Court of Appeal rules in favour of IBM in pensions case


The Court of Appeal has allowed an appeal by technology organisation IBM Holdings, finding that the organisation did not breach its duty to members of its UK defined benefit (DB) pension scheme when restructuring its pension benefits.

The case, IBM United Kingdom Holdings v Dalgleish, revolves around the restructuring projects undertaken by IBM Holdings to amend its DB pension arrangement, and whether these changes acted against members’ reasonable expectations to breach the organisation’s duty of good faith.

IBM Holdings conducted a restructuring of its DB pension scheme in 2009, known as Project Waltz. This project included closing the scheme to future accrual from April 2011, amending early retirement policies from April 2010, and making future pay increases non-pensionable. Project Waltz followed two previous pension restructuring initiatives, Project Ocean in 2005 and Project Soto in 2006. Both employees and trustees for the scheme resisted the new proposals, claiming that they were not lawful.

The case was taken to the High Court, which ruled in 2014 that IBM had acted in breach of its contractual duty when proposing Project Waltz because members had to either agree that pay increases would no longer be pensionable or not receive future pay increases. The High Court also found that IBM’ consultation process had not been open or transparent, and that due to previous pension scheme restructuring, Project Waltz opposed the expectations that members had regarding their pension scheme. IBM appealed to the Court of Appeal.

The Court of Appeal ruled that the High Court put too much weight behind the reasonable expectation of members. Reasonable expectations relate to circumstances that are expected due to actions taken by the employer. In this case, the communications from IBM relating to Project Ocean and Project Soto gave employees a positive reason to believe that their pension benefits would remain in these arrangements, therefore the High Court judge ruled that Project Waltz breached contractual duty and Imperial duty, which refers to the damage of trust in a relationship between the employer and their employees.

The Court of Appeal stated that instead of relying on the notion of reasonable expectation, the High Court should have used a rationality test, where only relevant matters are considered. With this in mind, the Court of Appeal found that IBM was not in breach of its Imperial duty by seeking to implement Project Waltz.

A number of the judgements made by the High Court which relied on a strong assertion of the reasonable expectation, including that IBM had breached its duty of good faith, have therefore been dismissed. The Court of Appeal concluded that it would not be right to prevent Project Waltz from being implemented, and that no further consultation process needs to occur.

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A spokesperson at IBM Holdings said: “IBM is pleased that the Court of Appeal has allowed our appeals and dismissed the appeals brought by the Representative Beneficiaries. In doing so, the Court has upheld the reasoned business decisions IBM made to maintain our competitiveness during the height of the 2008 financial crisis, and determined that changes made to our UK defined benefit pension plans were lawful.”

Marcus Fink, pensions lawyer at PricewaterhouseCoopers (PWC), said: “The 2015 High Court ruling set the bar perilously high for employers. This rendered previous statements made only with the intention of assisting members’ understanding on complex benefit entitlements as possibly being automatically renewable contractual commitments. Employers therefore faced danger when making benefit changes intended to reduce ever increasing pension liabilities. The situation was especially desperate for employers suffering in today’s tough economic environment who need to reduce pension liabilities in order to stay afloat. The Court of Appeal ruling lowers the bar and provides welcome clarity in the area of contractual pensions commitments.”