UK: Risks of breaching reasonable expectations of pension scheme members

The High Court has held that an employer breached its duty of good faith to its pension scheme members by proposing changes that ‘confounded’ their reasonable expectations that their benefit accrual would continue in the future except in certain circumstances.

In IBM V Dalgleish, the High Court found that IBM UK Holdings Limited breached its duty of good faith to members of its defined benefit pension plans when proposing changes involving closing them to further accrual and freezing increases to pensionable pay.

The High Court found that these changes “confounded” the “reasonable expectations” of members (created by the employer’s communications at the time of earlier changes to pension arrangements) that their benefit accrual in the plans would continue into the future, except where there was a change in financial economic circumstances of the business. IBM was also found to have breached its good faith duty over the way in which it handled the consultation with employees in relation to the changes. We understand that IBM intends to appeal.

Actions for employers

Employers proposing changes to pensions or other discretionary benefits should audit prior statements of future intention to identify whether the changes might confound “reasonable expectations” on the part of the members or employees.

Any statements made when making the changes should also be carefully reviewed to ensure that no promises are made or expectations created which may be difficult for the employer to uphold in the future.

For more details see our legal briefing.