Project Waltz - Has the music stopped?

Project Waltz - Has the music stopped?

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Author: Jacqui Piper

Applies to: UK wide

The long awaited judgment on remedies in the case of IBM United Kingdom Holdings Ltd and another v Dalgleish and others has now been handed down.

The case concerned the attempted closure of some of IBM's UK defined benefit pension schemes in a suite of changes known as Project Waltz. Project Waltz followed on from previous changes (Projects Ocean and Solo). In the communications for these previous projects, IBM had included statements that there would not be any further changes to the defined benefit plans for some time which, it was held, had created 'reasonable expectations' in the eyes of the members that the schemes would continue without further changes.

In his 2014 judgment, Mr Justice Warren held that IBM's conduct of Project Waltz, in particular the way the consultation exercise was carried out, was sufficient to justify members questioning the good faith and integrity of the company. This was, in Warren J's view, a breach of IBM's Imperial duty (an implied duty of good faith) and its contractual duty of trust and confidence.

This remedies judgment sets out how the IBM pension schemes concerned should now be administered and the remedies available to affected members. The judgment is very much in the members' favour, requiring IBM to unravel many of the changes made by Project Waltz, so very real consequences for IBM.

In summary the remedies are as follows:

  • Closure of the plans to future defined benefit accrual - this was carried out by way of serving 'exclusion notices' which stated that there would be no further active defined benefit membership after the date of closure. Warren J held that these notices were a breach of IBM's Imperial duty and also its contractual duty of trust and confidence. As a result, he held that the notices, although not void, were voidable and liable to be set aside in their entirety at the election of each individual affected member. Each member can therefore elect to set aside the applicable notice. They will then be treated as continuing in active membership (continuing to accrue defined benefits) beyond the purported closure date of 6 April 2011. In order to end their continuing active membership IBM will now have to serve fresh notices with prospective effect (before which a further period of consultation will need to be carried out). Warren confirmed that the trustee should administer the schemes on the basis that affected members are entitled to have the exclusion notices set aside. This could have a substantial financial impact on IBM with (potentially) all members being entitled to at least an addition four years of active membership.
  • Non-pensionability agreements - these were agreements with members to prevent future pay increases from being pensionable on a defined benefits basis. Warren J held that these agreements were not, of themselves, contracts and, as such, were unenforceable. Any attempt by IBM to enforce the contracts would be a further breach of its duty of trust and confidence. As a result, salary increases since 2009 (although granted on the basis that they were not pensionable) are to be retained and treated as pensionable. Members who did not sign the agreements (thus not being entitled to any salary increases under Project Waltz) are entitled to damages to reflect the salary (and related benefits) they would have received but for Project Waltz.
  • Favourable terms for early retirement - a period of two months was given during which favourable terms for early retirement were offered, after which a new early retirement policy was introduced (see below). During this time, it was claimed that a significant number of members retired earlier than they would otherwise have done. It was held that this also breached IBM's Imperial duty and its contractual duty of trust and confidence, giving members the ability to claim damages or equitable compensation. The members are, however, still to be treated as having taken early retirement.
  • Introduction of new early retirement policy - a new, cost neutral, policy was introduced which was more restrictive than the old policy. Warren J has held that this policy cannot be relied upon against members who would have been entitled to early retirement benefits under the old policy, had it remained in force (the court held that this would apply to all members who left service between 6 April 2010 and 31 March 2014). However, IBM is free to adopt a new policy after 31 March 2014, subject to adequate notice being given. For those members who retired during the above four year period, the trustee should now provide them with the benefits (including retrospective adjustments) which they would have been entitled to under the old early retirement policy on the basis that IBM's consent was either not required or that it would have been given.
  • Consultation - Warren J was very critical of IBM's consultation process, holding that IBM had already decided to make the changes, had provided misleading information, and that the consultation was a mere rubber stamping exercise. IBM had therefore failed to undergo a proper consultation exercise with the members. This was held once again to be a breach of IBM's duty of trust and confidence, giving rise to remedies for breach of contract, injunctive relief and damages.

We understand IBM has indicated it will seek permission to appeal this decision so the final outcome remains uncertain.

Although this case was dependent on its own facts, given the serious implications to IBM of the remedies, and the comments made by Warren J in his 2014 judgment, it is clear that there are some important lessons for employers wishing to make changes to their pension schemes:

  • Beware of statements made in previous member communications which might give rise to 'reasonable expectations' about the future of the scheme. If such statements have been made, consider carefully the timing of any subsequent changes.
  • Consult properly, with accurate and complete communications, keeping an open mind and considering all representations made. Take care when communicating internally to avoid statements which might be interpreted to suggest that a decision has already been made before the end of the consultation period.
  • Ensure that you have a robust business case for the proposed changes.

Disclaimer

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

About the Author

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Jacqui Piper

Associate

03700 86 8412

Jacqui is experienced in advising employers and trustees on occupational pensions schemes. She has particular experience of drafting pension scheme documents and advising on scheme governance and trustee support. She also regularly works with corporate trustees.

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