And The Law Says

Key points every employer should remember before changing pension schemes

March 10, 2015

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A further judgment in relation to the High Court’s significant recent decision in IBM v Dalgleish [2014] has recently been published, ruling on the remedies available to the employees whose future pension benefits and pension options had been unlawfully changed by their employer.  In general, the court ruled that where benefit changes had been judged to be in breach of the employer’s duty of good faith and mutual trust and confidence, the changes could be unravelled.  In other words the employees may be treated as if the changes had not happened.

As employers and trustees in general consider options to reduce liabilities in relation to future DB benefit accrual, it is worth reviewing the key principles from the High Court’s judgment in the case:

  • Employers may be at risk of challenges from members or scheme trustees if they make changes to pension schemes in breach of their duty of good faith to their employees, or in breach of the implied duty of mutual trust and confidence implied into employment contracts.
  • If a pension scheme change is challenged by members, or by the scheme trustees, the courts are likely to look widely at all communications to employees and members in the past, in addition to current communications regarding the proposed change.
  • The courts may consider the impression and expectation created in the mind of a hypothetical reasonable pension scheme member based on communications received from employers.  For example, an historic pledge by an employer not to make any future pension benefit reductions could mean that any future pension benefit reductions are in breach of the employer’s duties above.
  • It will therefore be crucial for pension communications to be both accurate and to create the right overall impression to members.
  • Pension trustees should enquire into the employer’s reasons for making a change; if an employer has breached its duty of good faith, the exercise of its powers to amend the scheme will be invalid.  In certain cases trustees may ask the court to determine such issues.
  • Changes to pension benefits that are later judged to be in breach of the employer’s duties above can be invalidated by the courts.

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