Employer duties: Court of Appeal decisions signal a more pragmatic approach

Case 1: Bradbury v BBC

The key issue for the Court of Appeal here was whether an employee's salary could be increased without increasing the final salary pension liability.

Background

Between 2008 and 2009, the BBC was faced with a growing deficit in its pension scheme.

The scheme was made up of several sections. Mr Bradbury was a member of one of the final salary sections with his pension calculated by reference to "Basic Salary". As part of an attempt to manage their pension liabilities, the BBC offered members several options, one of which was to remain in the final salary section, but with a cap on future pensionable salary. Any salary increases would only count as a 1% increase for the purposes of calculating their pension.

The legal Issues

The main points for the court to decide were:

1. Did the wording of the scheme’s rules allow the BBC to introduce the cap?
2. Did the cap breach s. 91 of the Pensions Act 1995? This section provides broadly that members cannot give up rights to future pension benefits.
3. Did the change breach the BBC's implied duty of "trust and confidence" as an employer?

The Court of Appeal held that the BBC had the ability under the wording of the scheme rules to introduce the cap (over-ruling the High Court on this particular point). The cap did not breach s. 91 as Mr Bradbury did not at that time have any set right to an increase in salary. All he had was a right that an increase in "Basic Salary" be reflected in the amount he received on retirement. The cap changed the relationship between "Basic Salary" and the pay he received from the BBC, but did not change the "Basic Salary" itself.

The BBC’s implied duty of "trust and confidence" under the employment contract was not breached. This duty is breached where the employer acts "irrationally or perversely". The court held that the BBC’s choice to introduce a cap was a reasonable one given the circumstances of the scheme and so the duty was not breached.

Points to note

The analysis of the rules highlights the importance of understanding the limits of your scheme. The BBC had the advantage of pension being linked to a concept of "basic salary" that could be defined separately from what members are actually paid. This is not always the case and creates something of a “lottery” for employers based on how their scheme rules are drafted.

The ruling on s.91 should give some comfort to employers who have sought to de-couple remuneration and pensionable salary in a final salary scheme.

The court’s view on the implied duty is particularly significant. If an employer has a range of reasonable options open to them, it is not bound to choose one over another. The court focused on the size of the deficit and saw the BBC's actions as reasonable. This may reassure employers that are struggling with large deficits, though the judges expressed particular concern to protect the “quality and range" of the BBC's broadcasting services. Other employers may not receive the same treatment.

Case 2: IBM v Dalgleish

The role of a similar implied duty of “trust and confidence” was given more detailed consideration in this case. The key issues for the Court of Appeal here were whether employees had a "reasonable expectation" that no further changes to their pensions would be made and whether that expectation meant IBM breached its duty.

Background

IBM engaged in a series of steps to manage its pension liabilities. In 2005 members' contributions were increased (Project Ocean). In 2006 IBM offered members a choice between receiving pension for only two thirds of future salary increases and transferring to a DC arrangement for future service (Project Soto). From 2009 to 2011 a new set of changes was brought in (Project Waltz). The most notable were:

1. defined benefits were closed to future accrual
2. early retirement terms became less advantageous
3. pay increases from 2009 onwards would not count towards final pensionable salary.

The legal Issues

The High Court had previously ruled (in 2015) that member communications regarding Project Ocean and Project Soto gave members a "reasonable expectation" that no further changes would be made to pension benefits. The High Court had concluded that this was of critical importance and Project Waltz therefore represented a breach of IBM's implicit duty of "trust and confidence" to its employees.

The Court of Appeal took a different view. It held:

1. The communications around Project Ocean and Project Soto were not sufficient to create a "reasonable expectation" that the benefits would remain unchanged.
2. Even if there were a "reasonable expectation" in relation to some benefits, it would not last indefinitely and would have expired by the time Project Waltz was implemented.
3. Even if there were "reasonable expectations", a breach of the implicit duty of "trust and confidence” requires "irrationality". In essence this means that IBM's approach would have to be one that no reasonable person would choose given all the relevant information. The members’ "reasonable expectations" are just one factor in this. Project Waltz was a reasonable response to IBM’s circumstances and so was not a breach of the duty.

Points to note

This judgment will provide reassurance to many employers with final salary schemes, particularly given the challenge to closure to accrual. The bar for breaching the duty of “trust and confidence” is higher than the 2015 judgment suggested. The court will take into account the economic circumstances and will not hold an employer to generic expressions of intent for an extended period. Closure to accrual was seen as reasonable following the downturn in 2009.

However, this should not be seen as confirmation that liability management exercises are free from risk. The wording of the member communications and history of the company’s performance were closely scrutinised and the same outcome cannot be guaranteed for all such exercises. It has been reported that the members have confirmed they will not appeal to the Supreme Court, but it has still been a long and expensive process for both parties. A different approach at the early stages of Project Waltz, particularly in managing relations with trustees and members, might have proved more cost-effective.

If you would like to know more about the impact of the cases on trustees and employers, in particular in relation to liability management and closure to accrual, contact Richard Pettit or Justin Briggs.