Technology giant IBM’s decision to close its UK DB schemes has been ruled lawful by the Court of Appeal, in the culmination of an eight-year battle over the sponsor’s discretionary powers.
The decision overturns a previous High Court judgement by pensions specialist Justice Warren, which concluded that previous IBM communications had set “reasonable expectations” that further changes would not be made.
IBM will now be free to implement the changes known as Project Waltz, which included ceasing future accrual for most members, ending a beneficial early retirement policy, and ensuring that future pay rises would not count towards the final salary used to calculate pension.
The trustees’ role is to make sure that when benefit changes are made, the employers are acting appropriately
James Bingham, Sackers
At December 31 last year, the company had a global accounting deficit of nearly $15bn (£11.42bn).
The announcement of Project Waltz in 2009 had infuriated employees, as IBM had already made a series of changes to post-retirement arrangements, known as Project Ocean and Project Soto, in 2005 and 2006 respectively.
Trustees of the IBM United Kingdom Pensions Trust said they had doubts about the legality of the decision, so a court case was brought to test its validity.
In the High Court, Justice Warren considered that the scheme sponsor, in its communications surrounding projects Ocean and Soto, had created “reasonable expectations” for members that it would not make changes such as those proposed in Waltz.
High Court overturned
However, the Court of Appeal justices found that these expectations were not properly created or legally relevant, and concluded that as the decision was rational, it should stand.
“You’re going to have to have done something that really takes you above a line that shouldn’t be crossed before [the courts] are going to step in,” said Mark Smith, pensions partner at law firm Taylor Wessing.
He said the decision reflected DB sponsors’ right to take reasonable decisions in their commercial interest.
“Even if some of the conduct wasn’t what you might have hoped for... it’s effectively a recognition of the world in which we live,” he added.
No carte blanche for sponsors
The decision will have significant financial implications for IBM, but other employers who had been poring over past communications will also feel some relief, according to Robert West, a pensions partner at Baker McKenzie.
“As a result of this decision they should still look back at communications, but the test as to whether they’re bound is not as concerning to employers as it might otherwise have been,” he said.
West said the result should not be regarded as giving employers “carte blanche” to make any pensions changes. Such decisions would still have to be allowed under the scheme rules.
“One would hope that employers will still consult [on changes] on an open and transparent basis, notwithstanding the fact that one of the drivers behind that consultation has been the IBM decision at first instance,” he added.
The trustee role
West said the case will also give greater certainty to trustees of DB schemes where the employer is seeking to make changes.
That is important, said James Bingham, associate director at pensions law firm Sackers, given the trustees’ role in scrutinising these proposals.
“The trustees’ role is to make sure that when benefit changes are made the employers are acting appropriately,” he said.
He said that trustees should gather all the relevant facts and advice before making a decision, and should bear in mind employers’ legitimate reasons for making changes.
“Acting in the best interests [of the scheme] doesn’t necessarily mean lobbying the members’ case at every turn,” he added.
