Employers considering making significant changes to their U.K. defined benefit pension funds must take care not to breach their “Imperial duties” – that is, acting in good faith, according to lawyers in the U.K.
That is the lesson to take away from a high-profile case that concluded in the U.K. last month.
International Business Machines Corp., Armonk, N.Y., breached its duties to U.K. pension fund participants in the way it implemented a restructuring of its arrangements relating to two defined benefit funds, according to a ruling by the High Court of Justice, Chancery Division.
The firm restructured its occupational pension arrangements in the U.K. under a project known as “Project Waltz,” according to a 435-page ruling.
The firm closed two funds to future accrual, made future pay increases non-pensionable, and introduced a new early retirement policy – under which IBM could stop consenting to enhanced early retirements, according to the court ruling.
Justice Nicholas Warren said IBM acted in breach of its contractual duty relating to the way it consulted with employees over the changes — a consultation that “was not carried out in a way which was open and transparent,” according to the judgment text.
“This case will be a concern to employers who are considering making significant changes to the benefit provisions under their pension schemes, as it is the first time that an employer has been held to be in breach of its contractual and Imperial duties,” said Lesley Harrold, London-based senior knowledge lawyer at Norton Rose Fulbright LLP, in an e-mailed comment.
While the changes themselves were not enough to breach the duty, the way the consultation was conducted by IBM was an issue.
“This is a clear warning that employers must take very seriously their Imperial duties of acting in good faith and must implement these by communicating honestly and openly with members when scheme changes are proposed,” she wrote.
The role of the trustee of a pension fund was also addressed in the judgment. “(It) raises issues for pension scheme trustees in relation to consultation,” Ms. Harrold wrote. “Trustees are already required to check the powers in their scheme’s governing documentation to see if the employer’s proposals are possible. They must also ensure that the employer has complied with the consultation requirements.”
In addition, she said, it was suggested in the judgment that trustees have a role in considering whether members have reasonable expectations when it comes to their benefits, and whether any changes proposed by the employer would breach their Imperial duties.
A future hearing will consider the remedies the court can or should impose on IBM as a result of the breaches. At the time of the decision, a spokesman for IBM in the U.K. said in an e-mailed comment that the firm “fully intends to seek leave to appeal at the appropriate time, and remains committed to providing its employees and retirees compensation that is competitive and in line with market conditions.”