Money in the pot

first_img Previous Article Next Article Unrestis rife in the pensions market as company pots run dry and contributors areleft with less than they expected. Communication with pensioners is the key ifchanges to schemes are planned.  ChristopherMordue and Susan Thomas-Green reportReportsof employers changing or withdrawing from final salary schemes have becomecommonplace, provoking controversy and industrial relations unrest.Ata time of increasing scrutiny of executive pay, stock market volatility andconcern about adequate pension prevision, employees and unions are increasinglyhostile in their opposition to the withdrawal of such valuable benefits.Manycompelling forces are driving employers away from final salary schemes:significant pensions deficits, higher ongoing costs, changes to accountingrequirements and changing employment patterns. While the impetus for changeis strong, the process of amending or terminating final salary schemesdemands the careful navigation of a range of difficult legal issues. Theemployer’s options Manyemployers initially consider simply closing the scheme to new entrants. Thisseems an easy option as existing employees are not affected and the legalissues are straightforward. However, this is rarely enough to solve anyfunding problems.  Any deficit in the scheme will relate to the benefitsmembers have already earned – these cannot be taken away without individualmember consent.Further,unless there is a high level of employee turnover, the effect of future costsavings can be slow to show as contributions will continue for all existingemployees. Unions oppose scheme closures as the thin end of the wedge andbecause over time, they create a two-tier workforce. In many cases, employersdo not reap the expected benefits and a few years later are forced to take moredrastic action.Winding-upthe scheme is the most extreme step. This is usually to be avoided forschemes in deficit since, on winding-up, any deficit has to be made good by theemployer. Before 12 June 2002, this deficit was calculated on a basis laiddown by the Government that did not provide enough money for schemes to secureall the benefits in full – even though, with the falls in equity markets overthe past few years, many employers found themselves in deficit on this basis.On11 June the Government announced immediate changes so that any solvent employerwinding-up its scheme has to put in enough money to provide all benefits bybuying annuities and insurance policies to guarantee payment.Thesums involved are immense. In practice, winding-up a pension scheme is nolonger an option except for a company on the brink of insolvency. In thissituation, the pension scheme trustees may be able to accept an amount that isless than they are owed but is more than they would get if the company becameinsolvent – this is known as a Bradstock compromise after the first companythat publicly announced it had done this.Thepractical options facing employers are to freeze the scheme – no more benefitsare earned, but it is not wound-up – or to make changes to the benefits andmember contributions to reduce the company’s funding burden.Changingthe pension schemeAdvanceplanning is key to making a success of these options. Employers must notjust look at the contractual relationship with employees (see below) butalso at the terms of the pension scheme trust deeds and rules.Thiswill set out what powers the employer has under the scheme and whether thetrustees’ consent is needed or even, in rare cases, that of the individualemployees.Workingwith the trustees can be very important. The terms of the scheme mayprevent them from agreeing the employer’s initial proposals or the trustees maybe unwilling or reluctant to agree.  Itis important to remember that trustees, unlike company directors, have personalliability to the pension scheme members and their actions are often excludedfrom the company’s directors’ and officers’ insurance policy.Trusteeswill often have conflicts of interest, being both pension scheme members anddirectors or senior managers.  To avoid risks of members later challengingthe changes, it is important to either ensure that the trustees have separate,independent advisers or change the trustees so that those running the changeproject for their employer are not also approving it as trustees. This canbe done by bringing in an external independent trustee or by appointing newtrustees from in the company.Anothercomplication is that the trustees must look after the interests of all themembers of the scheme not just employees. While employees have an interestin the company’s survival, this will not always be important to pensioners andformer employees with preserved benefits. If the employer’s proposals wouldharm the funds held for these members, the trustees may have no choice but toresist the employer’s proposals. Discussingproposals with the trustees at an early stage when there is still scope toalter them is the best way to minimise potential problems.Ifthe trustees are opposed to the employer’s proposals they have a number ofweapons in their armoury. These range from making their own announcements tomembers, applying to court to stop the employer or even, depending on thescheme’s rules, threatening to wind-up the scheme completely so as to impose asubstantial debt burden on the employer. Itis vital for a successful change project to consider at an early stage what thetrust deed allows the employer and trustees to do and what the attitude of thetrustees will be.Itis also important to focus on what the future pension provisions for employeesare to be after any change and what the impact will be on the benefits membershave already earned. Some employers offer members a choice – pay a highercontribution or earn lower benefits. But this can be expensive inadministration terms and raises problems as to what to do with those who refuseor fail to select an option. For most employers, it is easier to apply thechosen option to all employees once a decision has been made.Employmentlaw considerationsEmployerscontemplating changes to pension provision for existing employees must alsoconsider how these affect the contract of employment. The ideal position is forthe employer to establish a clear contractual discretion to amend or withdrawthe scheme, either as an express term of the contract or through incorporation(often via a scheme booklet) of the powers of amendment and termination in thetrust deed and rules. Inthese cases, the employer’s actions would be consistent with the contract ofemployment, there would be no legal requirement for the employees to agree thevariation and no legal issue of dismissal or collective consultation wouldarise. Thisassumes, however, a clarity in the contractual documentation that is oftenimpossible to realise. Very often the waters are muddied by missing or unsigneddocumentation, badly drafted contracts and booklets, ambiguous or contradictorystatements in offer letters and staff handbooks, and the typical lack ofuniformity in employment contracts at any one time across group companies,sites and business units. Employersmust consider all of these factors when assessing whether they have a clearcontractual right to move away from final salary schemes. Ifthis clear contractual right is absent, the process of change involves avariation in terms and conditions of employment. It is naïve to expect that allemployees will voluntarily give up their final salary pension rights –variation by consent is typically impossible to achieve and the employer must assumethat the process will involve termination of the existing contractual rightsand re-engagement on new terms and conditions.Thisprocess of change will trigger the obligation to consult in respect ofcollective redundancies under s188 Trade Union and Labour Relations(Consolidation) Act 1992. This appears counter-intuitive because the employeris not reducing its headcount. However, redundancy for these purposes has amuch wider scope, meaning any dismissal (ie contract termination) that is notfor a reason relating to the individual employee.Theduty to consult requires the provision of information on the reasons for anddetail of the employer’s proposal and consultation before a firm decision ismade with a view to reaching agreement on ways and means of avoiding thedismissals, reducing their numbers and mitigating the effects of thedismissals. Theemployer must consult trade union representatives in respect of categories of employeecovered by trade union recognition. For employees not covered, consultationshould be with employee representatives. Detailed statutory rules govern theelection of employee representatives. The consultation obligation is animportant area of risk in the change project, as breach can result in aprotective award of up to 90 days pay per employee (there is no maximum amountof a weeks pay for these purposes) and the award is based on the extent of theemployer’s breach and not on any financial loss.Evenif there is the contractual flexibility to change the scheme, the impact of thechange will demand that consultation takes place. An employer that simply makesthe change risks serious damage to employee relations and industrial unrest.Theemployer will hope that the process of consultation results in employeesagreeing to the change. If not, the only way forward is to terminate theexisting arrangements on full contractual notice. This may trigger unfairdismissal liabilities, so the employer will have to be able to show acompelling business case for changing the pension scheme – to establish someother substantial reason for the change – and that a fair procedure involvingindividual consultation has taken place.Theprocess of employee consultation must also be carefully choreographed withobtaining approval from the trustees. There is no point in damaging employeerelations through a controversial proposal if the trustees ultimately rejectit. Equally,  seeking trustees’ consentwithout commencing some form of information and consultation makes it difficultto be seen to be undertaking genuine consultation at a later stage. The twoprocesses will have to run in parallel, with the trustees’ consent being soughtin principle subject to the outcome of employee consultation. SummaryThekey to a successful process of change is communication with the workforce andgenuine consultation, even if this is not strictly required. Employers willneed to develop and communicate a convincing reason for their actions, spellingout the reasons why the change cannot be avoided. It will also be important toidentify and explain the impact of the change on each individual employee andthe benefits they would receive under the replacement scheme. Andemployers should try to avoid own goals in terms of disputes over boardroom payor excessive severance payments that will only fan the flames of controversyand increase the risk of serious industrial unrest.ChristopherMordue is a partner in the employment group at Pinsents. SusanThomas-Green is a partner in the pensions group at Pinsents Related posts:No related photos. Comments are closed. Money in the potOn 1 Dec 2003 in Personnel Todaylast_img

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