Published by Tyron Potts on
The rulings in both cases are likely to give reassurance to employers that benefits can be altered in the way that the BBC and IBM did, in particular by restricting what pay increases qualify as ‘pensionable’.
The cases highlight that care must be taken to avoid costly challenges in the courts.
In Bradbury vs the British Broadcasting Corporation (the BBC), the court considered what employers must take into account when exercising their discretionary powers under pension scheme rules in relation to liability management exercises. The case centred on a decision to restrict future pensionable salary increases in the scheme – a decision that was later challenged by a pensioner member, Mr Bradbury.
In an attempt to address a multi-billion pound deficit in their DB scheme, the BBC capped future pay rises that would count towards members’ pensionable pay at 1% p.a. Members were given the option to switch to Career Average Revalued Earnings (“CARE”) or Defined Contribution (“DC”) benefits for future service as an alternative to accepting the 1% cap.
The Court of Appeal considered three key questions:
Similarly, IBM UK wanted to exclude future salary increases from the pensionable pay figure used in calculating its UK DB scheme members’ pensions. In addition, IBM closed its DB schemes to future accrual (except for some members where this was not contractually possible) and ended an enhanced early retirement policy.
Collectively these changes were known as ‘Project Waltz’ and followed earlier exercises in 2004 (‘Project Ocean’) and 2006 (‘Project Soto’), each of which was also intended to control IBM’s pension liabilities.
The Court of Appeal examined whether IBM was in breach of two legal duties, namely:
It was not the benefit changes themselves that were necessarily the problem here. Rather, it was argued that members had a “reasonable expectation” that further changes would not be made to their benefits, resulting from communications issued during the earlier Projects Ocean and Soto.
The Court of Appeal judges sided with IBM. In their view, the key factor in deciding whether IBM had breached its Imperial and Contractual duties was whether it had behaved “rationally”. In overturning the High Court ruling, the appeal judges suggested it placed too much emphasis on members’ reasonable expectations.
Both judgements emphasise the importance of taking legal advice before making benefit changes.Tyron Potts
Both judgements emphasise the importance of taking legal advice before making benefit changes.
The BBC judgement will no doubt provide comfort for employers that they can take reasonable steps to address deficits and specifically that the law does not prohibit capping of future pensionable salaries. The case highlights however that employers and trustees should check the wording in their rules carefully before proceeding.
In overturning the High Court decision in IBM vs Dalgleish, the court has rejected the notion that an employer’s duty of confidence and trust requires that the ‘reasonable expectations’ of employees to be satisfied - unless no other course of action is open to the company.
Nevertheless, carefully considering member communications to ensure they do not give members false impressions about the future of the pension scheme will help other schemes to avoid challenges and
costly court cases like these.