On 20 February 2015, the High Court gave its ruling on the remedies available to members and the legal impact of its previous finding that IBM had breached its duty of good faith towards them. With 340,585 words stretching over 512 pages, the IBM judgments give Charles Dickens’s Bleak House (360,947) a run for its money in both length and legal complexity.
Our overview (IBM Remedies Judgment - What does it all mean?) is a far more manageable three pages.
We've distilled the key lessons from the judgment into this alert to provide practical points for employers dealing with pension changes.
Remembering three Ps (proposal, privilege and protection) provides a framework for minimising legal risk.
Proper planning promotes positive process
IBM has lessons for all benefit change exercises, especially those that involve pensions, retirement terms and policies and employee consultation. The cost and complexity of getting it wrong mean that employers should plan their proposal carefully and with legal advice.
Do due diligence
A key plank of member complaints in IBM was that the employer's previous benefit change exercises and communications had given them 'reasonable expectations' regarding how such benefits will be treated going forwards. Many benefit change exercises are considered in isolation, especially if managers and advisers are no longer around to provide a context for the proposals.
Employers (and their legal advisers) should check records covering contracts of employment, offer letters, employee handbooks, pension scheme booklets, communications on benefits (including letters, emails and intranet pages), discussions with trustees (including letters and meeting minutes) and previous proposals and consultations.
Stress test your business case
One of the areas that the High Court considered in IBM was the importance of the employer's business case. Employers can mitigate some of the legal risks associated with benefit change exercises by:
- thinking about the commercial and business issues;
- putting together a detailed and thorough business case;
- asking for professional advice (including legal advice) on the business case;
- effectively communicating the business case to members as part of consultation;
- discussing the business case with trustees as part of the process;
- providing full answers to member and trustee questions; and
- being open-minded to suggestions and genuinely considering the viability of any alternatives.
Don't just follow orders
In IBM, the High Court found that the managers of the UK business had not established or communicated a valid business case for the proposed changes. One of Warren J's concerns was a subsidiary merely following a direction from its parent company rather than formulating its own business case.
Consult in good faith
Ensure consultation with employees on pension scheme changes is based on a proposal rather than a 'done deal'. Employers must enter into and conduct consultation 'in good faith' to avoid the risk of breaching implied terms of good faith.
Fools rush in?
One useful way to manage legal risks is to ensure that employers give enough time to:
- developing their proposal;
- discussing the proposal with trustees;
- communicating their proposal to affected employees;
- consulting with affected employees; and
- making a final decision on the proposal following the conclusion of consultation.
Employers (and their advisers) should ensure that internal and sensitive documents relating to benefit changes do, as far as possible, attract legal privilege.
This can have an important impact on how and whether those documents are disclosed in court if the matter becomes subject to litigation.
Take steps to maintain legal privilege and protect confidentiality by:
- forming a project management group - consider who needs to be involved and limit membership by applying a 'need to know' test;
- restricting circulation of key documents to members of the project management group;
- setting up information barriers within the organisation so that key documents are only available to the project management group; and
- being particularly careful when sending email to people outside of the project management group - especially to the trustees and their professional advisers; and
- taking legal advice as soon as possible (i.e. before proposals are formulated).
Questions for employers to consider
Before putting together a proposal, employers should consider these questions and discuss the answers with their legal advisers:
- have you carried out previous benefit change exercises?
- do you have full records of historic communications with members and trustees on benefits?
- have you made any promises or commitments in relation to benefits?
- do you recognise any trade unions or other employee representative groups in relation to benefits?
- have you considered your business case for making any changes?
- what is your time frame for considering and, subject to the outcome of consultation, implementing proposals?