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The Court of Appeal today allowed IBM’s appeal against a series of landmark High Court decisions, which had struck down major reforms to its pension schemes on the grounds that they disappointed ‘reasonable expectations’ held by employees.

The judgment is the first appellate decision regarding the scope of the so-called Imperial duty, which restricts the exercise of an apparently unfettered discretion by an employer under a pension trust. It also involved alleged breaches of the implied contractual duty of trust and confidence, in relation to both an employer’s exercise of pension trust discretions and the procuring of non-pensionable pay contracts. In a series of judgments, the High Court (Mr Justice Warren) had held that IBM’s conduct had breached both the Imperial and contractual duties, so that the exclusion of members from the pension schemes was invalid. The key basis for that decision was that the reforms unjustifiably disappointed ‘reasonable expectations’ held by employees as to the future of the schemes, which IBM had engendered in its employee communications during previous reforms.

The Court of Appeal (Lady Justice Arden, Lord Justice McCombe and Sir Timothy Lloyd) held that the High Court had given undue substantive force to such ‘reasonable expectations’. Instead, the question was whether IBM’s conduct had been rational, in all the circumstances, in a Wednesbury sense. In answering that question, the weight to be given to competing factors was a matter for the decision-maker, not the Court. Any ‘reasonable expectations’ were no more than one factor to be considered. The Court of Appeal also found that there is nothing objectionable in an employer indicating that it will only award future pay increases if employees agree that they will not count towards the calculation of defined benefit pensions.

The Court of Appeal’s 212-page judgment followed a 10 day substantive hearing in May this year.    

The Court of Appeal’s judgment is available here

Dinah Rose QC and Fraser Campbell acted for IBM in the Court of Appeal, instructed by Richard Collins and Suzanne Duff (of Bond Dickinson) and Dan Schaffer (partner-elect at Slaughter and May).