Clarity on scheme change decisions: BBC and IBM
The Court of Appeal has ruled this week on two long-running disputes relating to the ability of an employer to change pension benefits for future service – for example by closing a scheme to future accrual and/or capping pensionable pay. The two decisions provide greater clarity for both employers and trustees considering proposals of this kind.
The IBM case – primacy of ‘reasonable expectations’ overturned
The Court of Appeal’s decision in IBM v Dalgliesh overturns a significant previous High Court ruling that IBM had breached its Imperial duty of good faith and its contractual duty of trust and confidence towards its employees. The key factor in the High Court’s decision was the finding that IBM had, by its communications with members in the context of earlier benefit redesign exercises, created ‘reasonable expectations’ about the future of its DB plans, and that its actions were inconsistent with these reasonable expectations. The Court of Appeal has now ruled that any such expectations were just one of many relevant factors to be taken into account in the decision-making process. Other factors, including changes in financial and economic circumstances, were also relevant. Trustees will wish to satisfy themselves that proper consideration has been given to all relevant factors and to test the employer’s case, but it is clear that members’ expectations based on previous communications do not present as great a hurdle as was suggested by the High Court.
The Court of Appeal also ruled that ‘non-pensionability agreements’ – changes to the employment contract under which members agreed that future pay rises would not be pensionable – would only breach the contractual duty of trust and confidence in extreme circumstances (for example, where a pay rise was being given to other comparable employees).
It’s worth noting that the Court of Appeal drew attention to the High Court’s significant criticisms of IBM’s conduct of the consultation process in relation to the pension changes. Defects in that process, including misinformation and failure to consult with an open mind, constituted in themselves a breach of the contractual duty of trust and confidence. The remedy for this, in IBM’s case, would be a claim for damages by the affected members – but the Court of Appeal refused to order a new consultation process.
For more details of the IBM decision, see our eAlert of 4 August 2017.
BBC case – power to determine ‘basic salary’ and importance of context
In the case of Bradbury v BBC, the BBC has succeeded on all points. In previous High Court decisions, Mr Bradbury had argued that the BBC’s method of capping pensionable pay (via the definition of ‘basic salary’ in the scheme rules) was invalid, and that its actions had breached its Imperial and contractual duties. These claims, together with others (including a claim of improper coercion in achieving the pay cap by way of the employment contract) were rejected – for a summary of previous decisions, see WNTW, 26 May 2015.
Three issues were considered by the Court of Appeal:
- Did the definition of ‘basic salary’ permit the BBC to determine whether (or how much of) a pay rise counted as basic salary, or was it a breach of the scheme rules to impose the cap? The Court held that the definition of Basic Salary as ‘the amount determined by the BBC as being an Employee’s basic salary or wages’ was wide enough to allow the BBC to decide whether/how much of an increase in pay counted as Basic Salary. Its determination would have a ‘ratchet’ effect – that is, the power would not allow it to determine that some part of the existing Basic Salary was non-pensionable for the future. The Court of Appeal overruled the High Court on its interpretation of the definition.
- Did the cap breach section 91 of the Pensions Act 1995 (the restriction on surrendering future pension rights)? Mr Bradbury argued that he had an existing right to a future pension based on his final pay, and the pensionable pay cap infringed this right. The Court rejected this argument, saying that section 91 had no application to a change to Mr Bradbury’s employment contract, and in any case did not apply in situations where a person may acquire a future right to a pension as a result of a future increase in pay – this does not constitute ‘a right to a future pension’.
- Had the BBC breached its implied duty of trust and confidence? The argument here was that even if there was no breach of the scheme rules or section 91, the BBC had breached its implied duty of trust and confidence through the process by which it had decided to propose the cap, or that the cap singled out a class of employees for less favourable treatment (i.e. those who did not agree to the cap and, therefore, received no pay rise). Lady Justice Gloster dismissed this, saying that:
‘The respondent’s conduct had to be assessed against the reality of the background that the respondent was faced with a multi-billion pound deficit in the Scheme and where the trustees, the unions and the respondent all agreed that something had to be done.’
The IBM decision, in particular, may affect the weight given to members’ expectations and the content of historic communications by trustees and employers considering scheme change exercises. The decisions clarify that those expectations remain a relevant factor for consideration, but that the employer’s financial circumstances are equally relevant. The Court of Appeal’s detailed consideration of the precise test to be applied in assessing whether the Imperial duty has been breached will help both trustees and employers engaged in scheme change decisions.
FCA consultation and ‘insistent clients’
The Financial Conduct Authority is consulting on changes to its handbook guidance to assist advisory firms and pension providers where clients want to proceed – for example, with a DB pension transfer – against the advice they have been given by a financial adviser. Some pension providers have been unwilling to accept pension transfers from these ‘insistent clients’.
The FCA recognises the right of an individual to choose a different action to that recommended by an adviser, and intends to amend its guidance to clarify that advisers should facilitate a request that conflicts with a personal recommendation they have made, provided that specific conditions (including communication of the risk involved) are met. The consultation closes on 2 October 2017; a policy statement and updated guidance are expected in December.