Consultation - changing scheme benefits

From April 2006 employers with occupational pension schemes or employers who contribute to a personal pension scheme on behalf of employees have been obliged to consult with employees (or their representatives) who are active or prospective pension scheme members when proposing certain changes to their pension benefits.

We have become aware that many employers have not focussed on their consultation obligations when commencing the initial planning stage for implementing changes to their occupational scheme.  This bulletin provides a refresher for those employers who are not fully conversant with their consultation obligations and is also a useful reminder for trustees of schemes of the steps an employer should be taking.  Trustees can then carry out the relevant checks to ensure that the consultation process has been completed.

The Regulations which introduced the consultation requirements are being phased in gradually depending on the number of employees an employer employs and apply as follows:-

Number of Employees	Date law comes into force
150 or more	6 April 2006
100 – 149	6 April 2007
50 – 99	6 April 2008

Employers with less than 50 employees are exempt from complying with the consultation requirements, together with a limited number of other specific employers.

Who is affected by the consultation requirements?

Employers, trustees and managers of a scheme (and for multi-employer schemes, any person who has the power to make amendments under the scheme rules, e.g. the principal employer) cannot take the decision to make a "listed change" unless the consultation requirements under the Regulations have been met by the employer.  As soon as a listed change is proposed, the relevant parties should initiate a consultation.

What constitutes a "listed change"?

"Listed changes" are specific changes in relation to pension schemes which are listed in the consultation Regulations.

With regard to occupational pension schemes, key examples of these "listed changes" are:-

• increasing the normal pension age specified in the scheme rules;
• closing the scheme to new members (or to certain categories of new members);
• removing the liability to make employer contributions to the scheme;
• increasing (or requiring) member contributions;
• preventing future accrual of benefits under the scheme for all members or for certain members;
• changing some or all of the benefits under a defined benefit scheme to defined contribution benefits or an alternative type of benefits; and
• for defined contribution arrangements, a reduction in the amount of employer contributions to the scheme in respect of members or a particular category of members.

A key distinction to make is also that "listed changes" as defined in the Regulations relate only to future pension changes.  Where the proposal is to modify a member's subsisting rights, section 67 of the Pensions Act 1995 (now in amended form) applies and it is the trustees of an occupational scheme who must ensure the requirements of section 67 are met.

Who should be consulted regarding a listed change?

When an employer proposes to make a listed change to a pension scheme, affected members should be consulted.  A member will be deemed to be an affected member if he/she is either an active scheme member or a prospective scheme member (i.e. employees who have not joined the pension scheme but would be eligible to join) to whom the change relates.  If the members have established representative bodies, the Regulations also cover consultation with such bodies.  For brevity, we have not covered this but can provide tailored advice on an individual basis.

The consultation process

For a consultation process to be effective, affected members or their representatives must first be provided with written notification of the proposed change.  The Regulations set out various requirements for this written information although they do not provide a detailed specification as to the form or quantity of information to be given.  The Department of Work and Pensions (DWP) has issued guidance on the Regulations and suggests, for example, that the employer should ensure the widest coverage and simply placing information on a staff notice board will not be adequate.

The information provided must describe the listed change and state the effects it would have (or would be likely to have) on the scheme and its members.  Relevant background information must also be provided although employers may need to take advice on what is likely to constitute relevant background information.

Following distribution of information by an employer, an appropriate period must be allowed for carrying out the consultation and this must not be less than 60 days.  The DWP takes the view that there should be an exchange of views and dialogue between the consulting employer and the pension scheme members/prospective members.

At the end of the consultation process, any responses to the consultation must be considered before a decision is made.  Where, for example, the trustees proposed the listed change, the employer should inform the trustees in writing that responses have been submitted and allow the trustees an opportunity to consider the submissions.

A decision can be made by the employer or the party proposing the listed change if they are satisfied that the consultation requirements have been met.  Where the proposal for change has been made by trustees of an occupational scheme (or where the scheme's amendment power requires trustee consent), the trustees should take steps to satisfy themselves that the consultation process has been fully and properly carried out in accordance with the Regulations.  Although employers are under an obligation to consult, they are not obliged to obtain pension scheme members’ consent to the proposed change.

If an employer fails to comply with the consultation requirements and a valid complaint is made to the Pensions Regulator, the Regulator may take action against an employer.

If you wish advice on compliance with the consultation requirements, please contact one of the following Partners:-

• Louisa Knox
• Andrew Holehouse
• Edwin Mustard

30/10/2007