Achieving pension regime change

Those advising employers grappling with changing pension arrangements to prepare for auto-enrolment should also remain vigilant of the duty to inform and consult where certain defined changes are made to existing occupational pension schemes.

Certain “listed changes” trigger a requirement to consult, and employers must give formal written notice to members and prospective members of the scheme(s) of their intention to make the change. These include stopping further benefit accrual by existing members, and requiring member contributions where not previously required. In defined benefit schemes, examples include changing the scheme’s future service benefits to pure money purchase benefits, or changing the basis of future benefit accruals from final salary to career average. An example of a “listed change” in respect of money purchase (defined contribution) schemes is reducing the level of employer contributions.

Auto-enrolment is not, of itself, a listed change. However employers should be ready with information about what is in store for employees, and how auto-enrolment ties in with their current pension benefit provision: raising awareness of what is coming may encourage some who have not joined an existing scheme to do so while they have the option.

Contract progress

In order to implement a pension provision change it may be necessary to change contractual terms. This has to be done either by express employee consent or by serving due notice to terminate existing contracts of employment and offering new contracts on new terms. The latter potentially triggers the collective consultation requirements of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA) where more than 20 employees are affected at one establishment. This is because “redundancy” for the purposes of s 188 of TULRCA is defined as a dismissal “for a reason not related to the individuals concerned”, and therefore has wider scope than under the Employment Rights Act 1996.

Although the pensions consultation is a separate legal process, it is possible for it and the collective consultation process to run concurrently. The minimum period for consultation on the pension changes is 60 days, while that for collective consultation for changing terms and conditions is 30 or 45 days, depending on numbers affected (the 90-day period for situations where more than 99 employees are affected at one establishment has been reduced to 45 as of 6 April 2013, by SI 2013/763).

Pension requirements

The obligation under the pension consultation regime is to consult with “affected members” or their representatives. Affected members are active members of the scheme and prospective members (those who may join the scheme at some point), not deferred members or pensioners. Representatives could be a recognised trade union, staff representatives under an existing agreement, or members directly or specifically elected as pensions representatives. In the last mentioned case, employers must ensure that the representatives are active or prospective members of the pension scheme. Employers should check the terms of collective agreements with recognised trade unions to determine whether or not the union has bargaining rights in respect of pensions provision. If not, additional representatives may be required. Whether lay and trade union representatives will consult at the same table will have to be considered on a case-by-case basis.

Employers must, before the start of the consultation, provide written information on the proposed change, the effect on the scheme and its members, and the proposed timescale for introduction. The DWP recommends provision of illustrative examples, details as to the numbers of members affected, and the contact details of the Pensions Regulator. The consultation process can begin once employees and representatives have sufficiently detailed information to hand explaining the effect of the proposals, to allow for constructive and informed consultation. It should last for 60 days and is for the employer to facilitate.

Following the 60 days, any responses or alternative proposals must be considered before finalising any plan. If the statutory requirements are not complied with, the Pensions Regulator may impose a civil penalty of up to £5,000 against an individual employer, or £50,000 against a company. The Regulator can also issue an improvement notice, specifying particular steps that an employer must take, and can order a civil penalty as before if the employer fails to comply. However the Regulator does not have the power to reverse a change that an employer has made without meeting the consultation requirements. Indeed, the legislation expressly provides that an employer’s failure does not invalidate any such change.

Full details can be found in statutory sources, including the Pensions Act 2004, ss  259-261 and SI 2006/349 (as amended) – perhaps among the lesser-leafed pages of an employment practitioner’s Butterworths Handbook.