UK: IBM: Success For Members In Remedies Hearing

Last April we reported on the ruling of the High Court that IBM UK had breached its duty of good faith to certain of 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, introduced a new early retirement policy and non-pensionability agreements (NPAs) for future salary increases. The remedies flowing from those breaches have now been considered in a second judgment and the findings of the judge are broadly in favour of the members.

Non-pensionability agreements

The issue with perhaps the broadest potential relevance to other schemes is the NPAs. Members who signed these had agreed that any future salary increase they might receive would be non-pensionable. In the first judgment it was held that the NPAs had been obtained in breach of contract (being in breach of the implied term of trust and confidence). In the remedies judgment it has now been held that the non-pensionability term that formed part of the varied employment contract (once the salary increase was accepted) was not enforceable against members. Members who signed NPAs are therefore entitled to have their salary increases treated as pensionable (albeit subject to a previous NPA that was held still to be effective).

Some employees refused to sign an NPA and so did not receive salary increases at all. These individuals are not entitled to claim back-dated salary increases but will be entitled to claim damages if they are able to establish a loss by reference to the salary increases they would have received plus the value of the equivalent lost pension.

The detailed findings on NPAs could have important implications for employers and trustees of schemes where NPAs (or agreements partially restricting the pensionability of salary increases) are in place or are currently being considered. We will be issuing further guidance on this in due course.

Closure to future accrual

The exclusion notices which purported to end DB accrual were held to be voidable and can be set aside at the election of the member. The effect of this is that a member who was subject to an exclusion notice can now request back-dated DB benefit accrual. This would entail the reversal of DC accrual during the same period and so could be very complex to achieve.

If IBM UK wants to now end DB accrual it will be required to start the whole process again, including undertaking a consultation exercise with affected members.

Early retirement policy

IBM had introduced a new, less generous, early retirement policy. It was held in the first judgment that this change in policy was a breach of members' reasonable expectations and a breach of IBM UK's duty of good faith. Any member who retired under the existing "early retirement window" earlier than he might otherwise have done as a result of the impending introduction of the new policy may be able to claim damages if they can demonstrate a loss flowing from that breach.

It was also held that IBM UK could not rely on the new early retirement policy (it having been introduced in breach of duty). Consequently any DB members who had a right to be considered for early retirement with company consent and have left service should be treated as if consent was not required or as if it had been given.

Some members, leaving under a series of separation programmes, expressly waived rights to claim enhanced early retirement benefits. These members will not be able to claim the enhanced early retirement benefits but are not precluded from benefiting from other aspects of the judgment.

What does this all mean?

IBM UK may seek leave to appeal both the first judgment and/or the remedies judgment and the Court of Appeal my make different findings. However, in the meantime, employers and trustees should be reviewing any NPA exercises they have undertaken. Going forward, any employer considering making substantial benefit changes should ensure that they undertake genuine open consultation and take into account previous communications they have had with members which may have given rise to reasonable expectations about future benefits.

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.