Pension schemes are changing on a grand scale thanks to the rising liabilities of defined benefit (DB) schemes and the pension reforms that came into force on 6 April.
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- Pension schemes invariably face constant change, including the move from defined benefit to defined contribution schemes.
- Communications are key to winning buy-in from employees.
- Pensions change could also be the catalyst for improving the financial education of employees.
Employers only have to look at the likes of Tesco, which is consulting with employees on plans to close its defined benefit (DB) pension scheme and replace this with a defined contribution (DC) scheme, as a prime example of a pension scheme change.
Another example is that of Lehman Brothers, which follows a number of employers to have agreed a £675m buy-in transaction for its pension scheme with insurance firm Rothesay Life, following its application for bankruptcy in 2008.
Given the historical nature of pensions, it is not surprising that they are subject to many changes. The most common in recent years has been the move from DB to DC schemes. John Cockerton, a senior consultant at Towers Watson, says: “There has been a big move from DB to DC schemes but the end of contracting out [from the additional state pension] will continue to affect a lot of the pensions scheme change that we will see in the coming years, especially in the DB area. The end is nigh.”
Types of pension scheme change
Pension schemes are open to other changes, which could include the introduction of a different way of calculating benefits or contributions, or changes in legislation, such as the changing of default investments or at-retirement options to better align to the new pension freedoms.
Research by the Defined Contribution Investment Forum (DCIF), At-retirement solutions for the new pensions era, published in April 2015, found pension schemes have begun to evolve in terms of the member support they provide and their at-retirement investment design.
But whatever the reason, it is important for employers to ensure that employees understand, and are on board with, the changes happening to their pension provision, or they could be faced with lengthy discussions and potential strike action.
Proposed changes to the Lufthansa pension scheme, for example, led to employees striking for nine days between January and March 2015.
Karen Partridge, head of client services at AHC, says: “No matter what [employers] are communicating to employees, no one likes change. It is a process and a journey that employers must go on despite the severity. Employees are always comfortable with what they have got, and [getting buy-in] is about getting them to a point where they are comfortable going forward, which is the end goal.”
Typically, the procedure for change will be set out in the scheme rules. For example, if the rules state that the organisation has to set up a trust deed or it needs a certificate from the scheme actuary, especially affected DB schemes, these are strict requirements needed in order to make any change.
Any changes to a pension scheme will also require an employer to first inform employees of the proposals, followed by a consultation.
The correct communication is the most important aspect to achieving buy-in for pension scheme change. Initially, employers must deliver communications in writing and they can then explore other avenues such as face-to-face sessions as well as the use of modelling tools.
Ryan Sales, director at communications firm Landscape, says: “Employers need to make communication simple and de-jargon what is going on. Communication has many different means and can be done through tools, films, animations and gamification to make the process easier to understand for employees.”
HSBC is increasing the financial education available to its 45,000 UK employees ahead of changes to its pension schemes, due to come into effect in July. Its strategy is to use its financial education programme, KnowYou, which launched in 2013, to focus on education and motivation rather than straightforward communication, using different learning styles, such as watch, play, listen and read, to increase levels of financial knowledge.
And change could be the catalyst for such programmes to help increase buy-in and make employees more pension savvy. Jeremy Beament, director at financial education provider Nudge Global, says: “Change could also be the key catalyst for financial education. There is a need to make sure employees are aware and they are much more financially savvy, and the fact of the matter is employees will be upset.
“Financial education is critical in any pension scheme change to help people understand to maximise their opportunities to plan for the future.”
Annabel Duncan, client adviser – defined contribution at JP Morgan Asset Management, adds: “Communications differ a lot from scheme to scheme, employer to employer; it is very scheme specific and dependant on the change. But could we start to build in technology for employees to use to take action? The UK is a little behind on the tools to engage with staff during change and to win buy-in. It is certainly another avenue employers can explore.”
A consultation is a necessity and will connect with employees regarding the changes. It involves explaining the changes in more detail to members and listening to their concerns.
Mark Futcher, a partner at consultancy Barnett Waddingham, says: “There are certain legal requirements to any pension scheme change and employers have to open a 60-day consultation or even sometimes a 90-day consultation to get the views from employees. But there are also a number of issues to take into account such as employment law issues from an organisation perspective and the changing of contractual agreements.”
Trade unions will also be key to getting employee buy-in; Futcher adds that they need to be involved early on to ensure members are fully aware. They can help to get employees to agree on the change that is happening, as seen with Santander and its changing pension structure for its DB members (see case study).
Every pension scheme is different. In each case, the correct communication procedure will differ depending on the type of change. Although a difficult procedure, once agreed and buy-in is achieved, an employer’s hard work will pay off.
Case study: Santander communicates through defined benefit pension changes
Santander used effective communications and managed trade union engagement to win employee buy-in for its extensive pension scheme change.
The banking firm closed its defined benefit (DB) pension scheme in 2002 to new hires although the scheme still has some 5,000 employee members.
Its objective was to manage and reduce the scheme’s financial risk to the bank. Instead of closing to future accrual, it took the decision to implement a solution that linked to its business values.
The change involved capping pensionable pay increases from March 2015 at 1% a year for all DB members, automatically enrolling DB members into the defined contribution (DC) pension scheme unless they opted out, and offering matching employer contributions up to 12.5% for any salary not pensionable in the DB scheme.
It also offered DB scheme members that joined a new DC scheme a one-off lump sum worth 5% of salary or, if greater, £2,000.
Ian Barrett, reward manager at Santander, said: “We recognised long-serving employees valued their DB scheme, and therefore instead of closing the scheme we wanted to look for a better solution.
“What we did was fair and it preserved the DB scheme for members to continue to build up, but at a capped cost of 1% of pensionable pay. The rest of the pensionable pay would [make] up the employer contributions paid into their new DC scheme.”
Santander consulted with employees, but went through the changes with its unions beforehand and reached an agreement, which was then recommended to employees to accept.
The organisation needed to provide the right communications so employees could make their choice on the change, as staff could either continue to accrue DB and DC benefits, or opt out of DB and join the DC scheme as a full member.
As a result, the firm used a number of methods such as printed guides, an online pensions modeller, an online feedback tool and regulated advice, provided by JLT Wealth Management, at no cost to the employee.
Barrett added: “We had very comprehensive communications to help employees make their choice.
“The regulated advice was also integral to help them go through their individual assessments. It is a very innovative and complex arrangement, but as a result of our efforts we received no formal grievances and [it] was implemented in the Santander way.”
Santander is shortlisted for ‘Best DC pensions change’ and ‘Best flexible benefits – large employer’ at the Employee Benefits Awards 2015.
Viewpoint: Employers must be mindful of employees’ expectations during pension changes
‘A change is as good as a rest’ goes the old saying. Well, not if you are a pension manager or an HR director. Changing pension benefits invariably means hard work and tireless planning.
Legally, there are broadly two options for achieving change. The conventional route is to amend to the pension scheme’s trust deed and rules. This typically requires the consent of the trustees, which is not always straightforward to obtain.
As a minimum, trustees will want to understand the business case for change. But some trustees will want something in return, such as increased security for their members.
The alternative to ‘rule amendment’ is to agree variations to each member’s terms of employment. Case law has confirmed that this is enough to bind the trustees. But employers should nevertheless plan for a rocky road of negotiation, especially if the workforce is unionised, and have a plan for managing refuseniks.
Irrespective of the legal mechanism chosen, any proposal to reduce pension benefits will trigger a statutory obligation on the employer to consult with affected members for at least 60 days. The first step is providing information, describing the changes, their effect on members, the rationale and the time scales.
The second stage is to consult with staff or their representatives, for example elected union representatives. Consultations require more than simply giving a notice of a proposal; adequate time must be built into the process to obtain feedback and to consider and take account of that feedback.
Aside from the statutory requirements, in every employment contract there is an implied term of trust and confidence. This is called the implied duty of good faith and was explored in last year’s High Court IBM case.
While an employer is perfectly entitled to consider an act in its own financial interest, it cannot do so following the decision in IBM without balancing this against members’ reasonable expectations.
The employer needs to ask whether it has created positive expectations, through promises made in past communications, as to what will or will not happen to future pension benefits. Any such reasonable expectations need to be taken account of before making a proposal.
After all that planning, preparation and negotiation, the warm glow of satisfaction that accompanies successful change may not be enough, it is likely that what you will also need is a rest.
Fuat Sami is a partner at pensions law firm Sackers.