Members of IBM’s UK defined benefit (DB) pension scheme will be able to claim damages against it over the closure of the schemes, the High Court has ruled.
The technology organisation is seeking to appeal the latest decision in the case of IBM vs Dagleish, which it “respectfully” disagreed with, according to a letter to members from its director of HR Anne Conroy.
Mr Justice Warren previously found in April 2014 that IBM had failed to meet its legal obligations to members when it restructured its workplace pension scheme, known as ‘Project Waltz’, which included the closure of one of its DB pension schemes to future accrual, members agreeing to future pay increases being non-pensionable, and a new early retirement policy, under which IBM would largely stop consenting to enhanced early retirements.
The High Court held that in considering the scope of the ‘Imperial’, (after the case Imperial Group Pension Trust vs Imperial Tobacco) and contractual duty in relation to an employer’s exercise of powers under a pension scheme, the correct legal test for breach of that duty was one of ‘irrationality’ and ‘perversity’.
Mr Warren also found that IBM had misled members during the consultation process prior to closure, and said it had also implemented a restrictive early retirement policy.
Following an appeal by IBM, the judge has now ruled that the non-pensionability agreements (NPA) that had been signed by members to make future salary increases non-pensionable were unenforceable.
Employees who had not signed the NPAs were also granted the opportunity to seek damages to reflect the salary increases they would have received had IBM not implemented the changes.
It will be up to each of the employees to prove their losses on a case-by-case basis.
Furthermore, Mr Justice Warren also ruled that IBM would have to carry out a 60-day consultation before issuing a new exclusion notice, which could only have prospective effect, if it wanted to terminate further benefit accrual.
He said: “I have no reason to doubt that the implied duty of trust and confidence was wide enough to cover the breaches which I held in the judgment to exist. In my judgment, the members are entitled to a remedy for that breach. Their rights are not displaced by the statutory scheme.
“It follows in my view, as the trustee submits, that the members are entitled to claim the ordinary remedies for breach of contract. These remedies are not, in principle, restricted and may therefore extend to injunctive relief (if appropriate in accordance with established principles) as well as damages.”
The High Court also confirmed the existence of a related duty, owed to pension scheme members and beneficiaries.
The judgment will have substantial ramifications on businesses when they try to change employee benefits.
Fraser Younson, labour and employment partner at law firm Squire Patton Boggs, said: “This case highlights the fundamental importance that organisations must place on internal communications during a workplace consultation process.
“Employers need to be especially mindful of what they say to employees, particularly when they are trying to persuade them to take a certain action, so as not to undermine the trust the confidence with employees.
“Cost savings and arguments about ‘the bottom line’ might not be considered proper business justification for benefit changes, particularly when communication around such changes is found to be misleading.
“The employer’s breach of trust and confidence during the consultation process meant that this was, in the end, unenforceable.
“This means that employees will not be required to pay back those salary increases or even forgo them going forward. Staff might also now have a claim of equitable damages, requiring retroactive pension contributions for that higher salary.
“This is not the end of the road for this case. Firstly, Mr Justice Warren commented that he was not in a position to award damages to individuals. It was up to each of the employees to prove their losses on a case-by-case basis.
“Secondly, the judge seemingly dodged the issue of awarding exemplary damages for breach of contract, leaving that point to be argued for another time.”