In January’s legal update, we noted that the Pensions Act 2008 makes provision for the cap on the revaluation of deferred pensions for early leavers from defined benefit (final salary) pension schemes to be reduced from 5 per cent to 2.5 per cent per annum. Where schemes decide to implement this optional change, the reduction will apply to pension accruals from 6 April 2009, although past service benefits will still be revalued at the previous rate.
Where an amendment to scheme rules is required to adopt this change, (i.e. where the change does not happen automatically, as it does where scheme rules refer to revaluation “at the statutory rate”), we are advising clients that consultation with affected members is the safest approach.
The Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006 (the Consultation Regulations) place an obligation on trustees not to implement “listed changes” unless such consultation is conducted. It is our view that changing the revaluation basis is “a reduction in the rate of accrual” of pension benefits, and, as such, is a “listed change” in respect of which affected members must be consulted. If consultation is not carried out when it is legally required, the Pensions Regulator (TPR) will have the power from 6 April 2009 to impose a fine of up to £50,000 on a person who fails, without reasonable excuse, to consult before making a “listed change”.
However, opinion is divided on whether a reduction in the revaluation rate is, in fact, a “listed change” as accrual rate is not defined in the Consultation Regulations. TPR has orally confirmed to us its view that a reduction in the rate of revaluation is not a “listed change” but as yet has made no public statement. However, we have been unable to obtain similar assurance from the Department for Work and Pensions (DWP) on this issue.
Comment: it is unfortunate that TPR’s view has come too late for clients who wished to implement the change from 6 April 2009 and who had therefore commenced the consultation exercise. We are advising clients who have started the consultation process to complete it. If consultation with affected members has not yet begun, it seems unlikely that TPR will impose a fine for lack of consultation. However, it remains our view that the greatest protection for trustees and employers is afforded by conducting a consultation on the assumption that changing the rate of revaluation of deferred pensions is a “listed change”.