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IBM and employer's powers to change benefits

The Court of Appeal delivered its judgment last week in the complicated case arising out of IBM's attempts to amend its UK pension schemes in 2010-2011.

The Court of Appeal delivered its judgment last week in the complicated case arising out of IBM's attempts to amend its UK pension schemes in 2010-2011.  The appeal case was a substantial victory for the employer reversing the main parts of the High Court's ruling in 2014.  The case also provided more detail and clarity on how an employer can behave in making changes to employee benefits and contractual terms.  While the case was about pension benefits, its principles have wider application in the employer-employee relationship.

The High Court ruling of Mr Justice Warren was upheld in some areas.  The Court of Appeal agreed with him that an employer's statements in a benefit change project can create "reasonable expectations" among the workforce which then affect how the employer formulates subsequent benefit changes.  Where the appeal succeeded was in how those reasonable expectations are then taken into account.  Mr Justice Warren had said that they had to be honoured where possible; the Court of Appeal ruled that they only had to be taken into account alongside all other relevant factors affecting the employer's decision-making.  As long as the employer was rational in assessing reasonable expectations as a factor they could be outweighed by other competing relevant factors.  For IBM's UK employer a lot of pressure had been created by the post-2008 global economic downturn.

The Court of Appeal also supported the High Court's ruling that the employer's duty of trust and confidence affected how it exercised powers to amend a pension scheme.  As my colleague Louise Benski, one of our employment law specialists commented:

"This judgment will, no doubt, be welcome to employers.  It reinforces the importance of keeping clear records of: i) reasons for exercising discretion and ii) the decision-making process followed, especially where changes are being made to significant issues such as pay and benefits.  It reaches beyond pensions law, following a wealth of case law on how to exercise discretion fairly in the employment relationship.  Employers about to restructure any bonus or commission plans, in particular, should therefore take note.

The Court of Appeal also made it clear that the burden of proving a breach of duty lay with the employees – it was not for the employer to prove that it had acted rationally, in line with its duties of trust and confidence.  But the standard of scrutiny for employers' decisions is still high and requires us to pose the questions: were the right matters taken into account and was the result so outrageous that no reasonable decision-maker could have reached it? 

It may come as some consolation that, where there are various group companies, the duties to employees are owed by the employer only (instead of, in this case, the US parent).  Take heed though: if IBM UK, as employer, had given authority to its parent to make the changes, this could have been a different story."

We have seen a lot of clients looking at "non-pensionability agreements" over the last few years.  These are, usually, signed amendments to the employment contract where the employee agrees that future pay rises are not taken into account for pension benefits (or only partially taken into account).  It is useful that the Court of Appeal did comment on these saying that these would normally be enforceable and it would only be in extreme cases that they could be considered coercive to employees.

The case is long and detailed and contains many other points which can affect employee benefit change projects.  It is a helpful case for employers in showing that their decisions are to be judged against all the circumstances they face without undue focus on one special element, such as previous employee communications.  It will be an important case for pensions and employment lawyers for years to come.

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