There are three questions employers should ask before embarking on a pensions change project. First, they should question whether they can make the change. Employment contracts should be checked. If the change would breach the contract it will need varying. If the contract does not permit variations,the employer might need to obtain employee agreement or consider a ‘fire and re-hire’ approach, taking care to navigate the risk of unfair dismissal claims.
For benefits under trust-based pension schemes, the amendment power should also be checked to see if the change can be made by amending the scheme rules. This may require trustee consent. Sometimes the amendment power contains wording that means the ‘final salary link’ cannot be removed. There are also statutory section 67 restrictions that might apply if the change could adversely affect accrued benefits.
In light of recent case law, employers should consider their implied duty of good faith and contractual duty of trust and confidence towards employees. Previous conduct and communications to members about their pension benefits will be relevant.
Secondly, employers should consider who the changes will affect. Any potentially discriminatory effect of the changes on affected employees should be identified and considered. Employers should also be mindful of their automatic-enrolment duties when considering the impact of any changes.
Lastly, employers should also think about who they need to consult. UK employers with at least 50 employees may be required by pensions legislation to consult with affected employees for at least 60 days about the changes depending on the nature of the change. Changes that may trigger a consultation duty include increasing member contributions, decreasing employer contributions and closing trust-based schemes.
Recognised trade unions may need to be consulted under statutory requirements or agreements with employers if their members are affected. A ‘fire and re-hire’ approach to changing employment contracts triggers separate consultation requirements under employment legislation.
Sarah Miller is an associate at ARC Pensions Law