Landmark decision on UK employers' ability to alter pension arrangements overturned

The High Court’s ruling on the high profile case of IBM v Dalgleish has been overturned in the computer giant’s favour by the Court of Appeal.

A landmark decision on whether UK employers are in breach of a ‘duty of good faith’ by altering their pension arrangements has been overturned by the Court of Appeal.

The long-running and high profile case of IBM v Dalgleish focused on whether the computer giant had breached its duties as an employer by closing its pension scheme to future accrual and introducing additional benefit restrictions for members.

In 2014, these members successfully argued at the High Court that previous statements made by IBM pointed to an ongoing commitment to the scheme, which created ‘reasonable expectations’ about its future viability. Given the tech supplier’s financial position, the Court considered there was nothing to make members suspect that their expectations around future pension provision would not be met.

But in overturning the High Court’s decision, the Court of Appeal found that too much importance had been placed on potentially disappointing members’ ‘reasonable expectations’. While it ruled that this factor should be taken into account, it added that it should be weighed against other considerations too.

The Court also provided a rationality test. It said that, when considering whether they had breached their duty of good faith or not, employers should ask themselves whether:

1. They had considered only relevant matters;
2. Their decision was one that no rational employer would make.

In other words, while the ‘reasonable expectations’ of members would need to be considered, failure to meet such expectations would not necessarily result in a breach of the duty of good faith.

But it still remains unclear how the courts are likely to apply the rationality test in future. This means that employers should seek appropriate advice when altering their pension arrangements or communicating with scheme members.

Moreover, the fact that the High Court’s comments about proper conduct during statutory pension consultation exercises were not challenged on appeal implies that employers must ensure they are open with employees about the key reasons for change and should consult with an open mind.

It is unclear yet as to whether IBM will appeal this latest ruling in the UK Supreme Court.