Benefit change exercises - what are the practical implications of the IBM case for trustees and employers?

5 minute read
21 August 2014

The latest IBM case has implications for employers and trustees when considering changes to members' pension benefits. But what implications?

The most recent IBM judgment concerned IBM's Imperial duties, i.e. its obligation to act in good faith to members of its pension schemes.

"Project Waltz" was to be a major reform of two of IBM's UK pension schemes, made against the backdrop of a commitment IBM US had made to investors on Wall Street. The proposed reforms were not unusual, and comprised closing the schemes to future accrual, ensuring that future pay rises were not all pensionable and introducing cost-neutral early retirement factors.

Critically, Waltz was the third major raft of reforms of the two schemes in five years, the previous reforms being projects Ocean and Soto. After a long trial, the Court concluded that, taken together, statements IBM had made as part of Ocean and Soto would have led a reasonable person to expect that the plans would remain open absent a big shift in the company's fortunes.

In the light of the expectations which IBM had engendered, the issue was whether Waltz was an appropriate response to the problems IBM was facing. The Judge concluded it was not and found that, in seeking to implement Waltz, IBM had acted in a way that was irrational and perverse, in a way no reasonable employer would have done. IBM was held to be in breach of its duty of good faith to members of the schemes.

Specifically, there was a big disparity between the "warm words" IBM had uttered previously in Ocean and Soto (about benefits being "secure" and on a "long-term footing"), and what it wanted to do in Waltz.


A further hearing is underway to determine the legal consequences of IBM's breach of its Imperial (good faith) duties, but in the meantime, what are the potential practical consequences of what the Judge has already decided?


First, this case does not mean that employers cannot make changes to their defined benefit pension schemes or cannot close them. The problem was not the nature of the change, but rather what IBM had said in the past and the reasonable expectations this created.

It appears that the process of making changes to a pension scheme needs to involve:

  1. The employer having a sound business case for change to begin with, not just a vague need to reduce pension costs. Carrying out a parent company's orders will not be enough. The business case needs to be articulated clearly internally first.
  2. This business case needs to be conveyed to employees and members (and trustees) honestly and openly. Nothing relevant should be held back.
  3. The employer needs to have regard to what members might reasonably expect. In the light of that, is what the employer is proposing to do the kind of thing a reasonable employer, in good faith, would do?

In practice, this means looking at what employees have been told in handbooks, announcements, by video or webcasts, or on the intranet. How would a reasonable employee view what had been said in the past? Has anything moved on since those statements were made?


We are likely to see trustees being more cautious around employer proposals to close defined benefit schemes to future accrual.

Scheme design has been thought to be a matter for the employer only. However, this case suggests that there are issues for trustees to think about when asked to agree to changes.  Trustees don't want to be later criticised if they have agreed to the employer's proposals without properly considering the issues. This will particularly be the case where the employer is asking the trustees to exercise a joint power.

The approach adopted by trustees will depend on the individual circumstances. One approach might be for trustees to try to get warranties from the employer, maybe to the effect that it has complied with its Imperial duty of good faith. However, going beyond that, should the trustees be gatekeepers for any benefit changes? Should trustees go further and review the employer's business case for change, as well as what members have been told in the past?

A balance needs to be struck here, and trustees don't want to be criticised for having interfered in the relationship between an employer and its employees. We would usually expect trustees to speak to their professional advisers.

So what's next?

This judgment was not concerned with the legal consequences of the fact IBM had acted in breach of its Imperial (good faith) duties. This is being argued in another hearing, and judgment is expected in the autumn.

The legal effects of the judgment are therefore currently unknown. Can an employee or member sue IBM for damages? Or was IBM's attempt to close the plans to accrual invalid so that the intended change never took place at all (or later than IBM thought)?

These are big questions, with potential significant practical (and cost) consequences. We will be better placed to answer them when we have had the hearing on remedies and will update you again then.

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