IBM United Kingdom Holdings Ltd & Anor v Dalgleish & Ors

A non-fiduciary discretion under an occupational pension scheme, and an employer’s contractual discretion, must be exercised rationally. The applicable standard is equivalent to Wednesbury review. The decision-maker must consider relevant matters, exclude irrelevant matters and reach an outcome open to a rational decision-maker.

Expectations engendered among scheme members may be relevant, but they have no overriding legal status. They need not be satisfied unless departure is necessary. The legal burden of proving irrationality remains on the claimant, although an evidential burden may shift to the decision-maker to explain its reasons.

Defective statutory consultation does not affect the validity of a pension decision where Pensions Act 2004, section 259(3), applies. Contractual remedies remain available for an independently established breach.

IBM proposed Project Waltz, comprising closure of defined-benefit pension accrual, a less favourable early-retirement policy, non-pensionability agreements for future pay increases and associated defined-contribution arrangements. Representative beneficiaries and the pension trustee disputed the proposals’ validity.

Warren J held that the proposals breached the constraint governing non-fiduciary pension discretions, known as the Imperial duty, and the contractual duty of trust and confidence. His principal judgments were [2014] EWHC 980 (Ch) and [2015] EWHC 389 (Ch), followed by supplementary judgments at [2015] EWHC 1385 (Ch) and [2015] EWHC 1439 (Ch).

The companies appealed. The beneficiaries cross-appealed on whether the scheme’s Exclusion Power had been exercised for an improper purpose. The central questions concerned the correct rationality standard, the legal significance of members’ expectations, corporate separateness, non-pensionability agreements and the consequences of defective consultation.

1. Appeals allowed; cross-appeal dismissed. The judge had not applied the correct rationality standard. A discretion constrained by the Imperial duty, or by the contractual duty of trust and confidence, is reviewed by a test equivalent to Wednesbury rationality. The court must examine the rationality of the decision-making process and must not substitute its own commercial judgment. Both limbs may apply: relevant matters must be considered, irrelevant matters excluded, and the outcome must be one a rational decision-maker could reach.

2. Expectations generated among pension-scheme members may be relevant considerations. They do not possess overriding substantive force. The judge therefore erred by treating the expectations he found as requiring satisfaction unless IBM proved that no compatible alternative course was available. The findings of breach based on defined-benefit accrual, early-retirement policy and non-pensionability agreements could not stand.

3. The legal burden of proving irrationality remained on the beneficiaries. Once they showed a prima facie questionable decision, an evidential burden could shift to IBM to explain its reasons. IBM supplied extensive evidence and discharged that evidential burden.

4. The supposed expectations concerning early retirement and the duration of defined-benefit accrual were not established on the judge’s own criteria. A longstanding discretionary practice did not, without more, create an expectation possessing the attributed legal character. In any event, the judge failed to determine whether the financial crisis represented a significant change that displaced the qualified expectations.

5. The judge also erred by treating IBM’s group headquarters and the UK companies as one enterprise. Separate corporate personality had to be respected. Headquarters neither owed the Imperial duty nor had its knowledge and motives attributable to the UK companies merely because it exercised substantial group influence.

6. The non-pensionability agreements were not independently irrational, arbitrary or capricious. Nor was the Exclusion Power exercised for an improper purpose. The collateral invitation to former defined-benefit members to join the defined-contribution section did not contradict their exclusion from the scheme, and the inability to sever the final-salary link amounted at most to partial excessive execution.

7. The consultation was seriously defective and breached the statutory duties of both companies and UKL’s contractual duty. Nevertheless, an injunction requiring a new consultation was refused. Section 259(3) of the Pensions Act 2004 preserved the validity of the pension decision. A fresh consultation years later would require new proposals in materially altered circumstances. The beneficiaries retained a possible claim in damages against UKL for the contractual breach.

1. Court of Appeal (Civil Division): By [2017] EWCA Civ 1212, allowed the companies’ appeals, dismissed the beneficiaries’ cross-appeal and refused an injunction requiring fresh consultation.
2. High Court, Chancery Division: Warren J found breaches concerning Project Waltz in [2014] EWHC 980 (Ch). He addressed remedies in [2015] EWHC 389 (Ch) and supplementary matters in [2015] EWHC 1385 (Ch) and [2015] EWHC 1439 (Ch). Those conclusions were displaced to the extent stated by the Court of Appeal.