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Law & Regulation

IBM case a lesson to consider scheme history

By Tom Dines | April 14, 2014

Schemes must look at historical context when considering and communicating benefit changes, lawyers have urged, after the High Court ruled earlier this month that technology company IBM breached its duty of good faith with employees when closing its defined benefit scheme.

The court ruled this occurred when in 2009 the company announced the closure of its DB scheme to future accrual, effective from 2011, as previous changes to the scheme had given employees reasonable expectations about the future benefit accrual and early retirement policy.

Changes to the IBM scheme 

  • 2004: Project Ocean – IBM presented proposals to increase the member contribution rate for contributory DB plans and reduce the accrual rate for the non-contributory DB plan. It agreed a parent company guarantee and to pay contributions to reduce the DB plans’ past service deficit.
  • 2005-06: Project Soto – IBM gave members the choice between staying in the DB schemes with two-thirds of salary increases being pensionable or transferring to an enhanced DC plan while retaining a final salary link. In discussion of these changes IBM indicated that there were no plans for further changes.
  • 2009: Project Waltz – IBM presented proposals to close the DB plans to future accrual and make future pay increases non-pensionable for active DB members. It also created an early retirement window and a new early retirement policy, as well as allowing former active DB members into the DC scheme.

Sources: IBM, Sackers

The court has yet to rule on what remedies should be made. Lawyers have said the decision has implications for how trustees and employers make changes to their schemes.

Jennifer Bell, partner at law firm Nabarro, which represented the IBM pension scheme trustees, said: “Where proposals are being made to trustees, they need to look at those with respect to other events or changes that have happened previously and what the communications were.”

Employers should also consider past decisions when making future changes to their schemes, Bell said.

IBM issued a statement saying it disagreed with the court’s ruling and intends to appeal. There will also be a further ruling by the judge on ‘non-pensionability agreements’, made to carry through the company’s decision that there would be no further pensionable salary increases for active members.

“The court’s opinion acknowledges IBM’s right to make changes in its UK pension programmes,” said a spokesperson for IBM in a statement. “But we believe the court applied an incorrect legal standard in invalidating IBM’s exercise of that right.

“IBM fully intends to seek leave to appeal at the appropriate time, and remains committed to providing its employees and retirees compensation that is competitive and in line with market conditions,” the spokesperson continued.

The court has ruled that IBM was in breach of its contractual duty of trust with regards to the 2009 non-pensionability agreements, but has yet to come to a decision on similar agreements signed in 2011.

“The timetable for one or more of the parties to request permission to appeal may well be suspended until the outstanding matters related to the 2011 non-pensionability arrangements and the issue of remedies have been addressed,” said Robert Tickell and David Kay, co-chairs of the trustee board, in an update on the IBM Pensions Trust website.

James Bingham, associate at law firm Sackers, said the decision served as a lesson to trustees to make sure that when communicating changes they are not binding themselves on future decisions.

“If you make a change now, you can’t give a commitment [that might] give members a realistic expectation that there won’t be further changes,” he added.

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