UK: Good Faith: An Employer's Duty

Summary and implications

In a bumper 435-page judgment, the High Court has ruled that IBM UK breached its duty of good faith to its employees and former employees. The breach was triggered by the way in which it closed the DB sections of its pension schemes to future accrual and introduced new benefit restrictions. The judge (Mr Justice Warren) also found that consultation with employees about the changes was not open or transparent and held that this was also a breach of IBM's duty of good faith. The remedies flowing from the breaches will be considered at a later hearing.

Nabarro LLP represented the pension scheme trustee in this case.

This case is an important step in establishing the extent of the obligations employers owe their employees and former employees in relation to pension provision. It will be of great interest to any employer who has, or who is considering, ceasing DB accrual or introducing new restrictions on benefits. Key to this decision were the communications issued to members in the months and years before the changes were made – these were found to have given members Reasonable Expectations as to their future pension benefits.

Employer duties: contractual and under trust

The duties an employer owes it employees in relation to pension provision can be divided into contractual duties arising under the employment relationship and a duty of good faith in the exercise of discretionary powers under the pension scheme (often referred to as the "Imperial" duty). The IBM decision addresses these duties in great detail – with the judge then coming to the conclusion that in practice there may often be no significant difference between the two.

Contractual duty
An employer must treat his employees fairly in his conduct of his business, and in his treatment of his employees, an employer must act responsibly and in good faith; he must act with due regard to trust and confidence (or fairness).

Imperial duty
An employer must not act irrationally or perversely in the sense that no reasonable employer could act in that way.

The background to the case

The key changes which were the subject of complaint in the IBM case were the closure of the DB sections to future accrual, a freeze on pensionable salary (to be achieved through contractual agreement with employees), a more restrictive early retirement policy and an early retirement window before the new policy came into effect. The closure to accrual was effected by IBM unilaterally by the exercise of an "exclusion power" which allowed IBM by notice to determine that individuals would cease to be members. These changes were collectively referred to as Project Waltz.

Relevant to the decision were two earlier benefit change exercises known as Project Ocean and Project Soto. Some of the information and statements given to members during those earlier exercises were relevant to the court's findings insofar as they had given rise to members' reasonable expectations as to their future pension benefits.

IBM claimed two main reasons for wanting to make the changes. The first was so that the global group could reach its target for pensions related costs in order to meet its Earnings Per Share commitments to shareholders. The second was a local desire for the UK business to make operational improvements and savings (and cost savings in pensions would contribute to this).

The judge summarised the whole case in a single sentence: Was Project Waltz an appropriate response to the combinaton of problems facing IBM, taking into account the reasonable expectations of the members?

Key findings of the court

Crucially for IBM, the judge found that the exercise of the exclusion power in the manner that it was exercised was within the scope of the exclusion power (thus enabling the decision to stop future accrual for all DB members in one scheme and the majority of DB members in another scheme) but this was subject to members retaining the right to final salary linkage.

The judge also found that IBM was in breach of both its contractual and Imperial duties in imposing Project Waltz. He held that it was not something a reasonable employer would have done given his finding that that IBM had engendered amongst the members certain Reasonable Expectations relating to future benefit accrual and the operation of its early retirement policy. The Project Waltz changes were inconsistent with these Reasonable Expectations and this went to the heart of the relationship between IBM and its employees. In the judge's view alternative proposals could have been adopted which would have met both IBM's commercial needs and the members' Reasonable Expectations.

Members were entitled to expect IBM to carry out its consultation on the proposed Project Waltz changes in line with the requirements of the legislation and its own expressed core values. The judge found that the consultation exercise had not been open or transparent and that misleading information had been provided. He therefore held that IBM was in breach of its contractual duty of good faith in this regard.

The findings in this case are specific to its facts but some useful general points come out of the findings, particularly in relation to reasonable expectations and to the conduct of consultations.

Reasonable Expectations

The key factor in leading the judge to make findings that IBM had breached its duties was his conclusion that IBM had by its own acts engendered in its employees reasonable expectations, in contrast with mere expectations, as to what the future would hold for their pension benefits and then introduced changes which were inconsistent with those expectations.


Not every breach of a reasonable expectation will necessarily give rise to a breach of duty – the employee must then go on to show that the confounding of that expectation was sufficiently serious to constitute a breach of the contractual or Imperial duty (or both).

This emphasises the importance of clear and accurate communication with members. Employers should take care not to make any statements of intention, unless they are absolutely certain they will stand by them. Particular consideration should be given to setting a time limit on any statements as to future intention ("We will review the position again in 2016") or in making any promises subject to future business or market conditions.

Even though not establishing any immediate rights, the decision in IBM shows how difficult it can be to move the goalposts once expectations have been raised and members have made important decisions on the basis of information provided to them.

Consultation exercises

Employers are required by the Consultation by Employers Regulations to consult affected employees on certain changes to their pensions. Those regulations require the employer and employee "to work in a spirit of co-operation".

IBM purported to consult under the regulations but the court has found that they did not do so in an open or transparent way and deliberately provided misleading information as to the proposed changes. IBM was found to be in breach of its contractual and Imperial duties in the manner in which it carried out the consultation.

The consultation regulations allow the Regulator to impose a penalty of up to Ł50,000 for a breach of the consultation requirements. However, the judge rejected IBM's argument that the penalty under the regulations was the only remedy which could apply where there had been a breach of duty in relation to the consultation requirements.

Employers should take note. Consultation on changes to pensions is not just a tick-box exercise under the regulations. They must also be carried out in accordance with the duty of good faith. Conversely, a failure to consult under the regulations does not in itself give rise to a breach of duty.

Trustee consideration of employer proposals

Trustees should ensure that they consider an employer's proposals for future service changes in the wider historical context of the scheme, and not just the employer's current rationale and business case for its proposed changes. They should also ensure that the employer is exercising its powers for a proper purpose and, where a power is exercised jointly, that they as trustees can properly agree to the proposed changes. If Reasonable Expectations may have been engendered by an employer's past actions then it may be necessary for trustees to test this in court before agreeing to scheme amendments.

What next for the IBM schemes?

The judgment does not include any specific remedies and there are still a number of issues to be decided. It is also open to any of the parties to request permission to appeal. This means that the immediate practical consequences of the case are not yet clear and further judgments on consequential issues can be expected.

The full judgment of Warren J can be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.