Employers in a redundancy situation want to reach a fair severance arrangement with their staff and an amicable parting of the ways. But how can this be achieved? Gillian Dully and Fiona Thornton highlight some of the issues that might arise.

Depending on his age, an employee is likely to consider his pension benefit a valuable benefit within the overall context of his 'termination package', particularly if he has long service and is a member of the senior management team. For its part, an employer needs to establish what it can afford to pay. Pension benefits may feature in the severance terms. The pension benefits may merely reflect the pension scheme's usual leaving service entitlements or perhaps special enhanced terms may be on offer. In either event, the pension scheme's documents need to be carefully reviewed to establish the impact, if any, that redundancy has on the scheme and what procedures might need to be followed to enable special terms to be offered.

Communication

Employers are generally required to participate in an information and consultation process in the run-up to a redundancy. Pension benefits need to be factored in to this process. Depending on the circumstances, it may be appropriate for the employer to sound out the trustees of the pension fund in advance of publishing the terms of the redundancy programme to the workforce. The employer may need to get the trustees to buy into its proposals in advance of these being published so that it can be sure that what is proposed is capable of being delivered.

A delicate balance needs to be struck here between getting the trustees on board and making sure that there is no leaking of possible terms that may not in fact come to anything (perhaps due to improved trading or, in a worse case scenario, be less valuable due to the employer's reduced ability to pay). Even though it may be feasible to make sure that trustees are legally bound not to make any inappropriate disclosure, the employer still needs to make the call as to whether there might be a leak.

Is tax planning appropriate?

An employee facing termination may well be anxious about his pension benefits. Depending on the employer's flexibility it may be possible to permit departing employees to tailor their severance terms to suit their own circumstances. For example, one employee might prefer a larger sum on termination whereas another employee might prefer a greater pension on retirement. Providing individual tax advice comes at a cost and this is another point that needs to be factored in to the cost of the redundancy.

Information to be provided

A departing employee must be provided with specific information by the trustees of the pension scheme, including details of his pension rights and the options available to him on leaving service. This information must be provided as soon as practicable on leaving service and, in any event, no later than two months from that date. Failure to meet these deadlines is an offence under the Pensions Act and the trustees could be prosecuted for non-compliance.

Severance agreement

Where the severance arrangements say that departing employees must sign a severance agreement containing waivers of rights against the employer, it is strongly advisable that the leaving service option statement is included as a schedule to the agreement so that the departing employee signs off on such benefits and waives all rights against the pension scheme trustees as well. This requires advance planning by the employer so that the trustees are briefed to have their administrators ready to supply the leaving service option statement at or in advance of the termination date. This step will invariably save the employer money.

In most cases, the employer pays the running costs of the pension scheme. Should a dispute arise, even if the trustees only have to provide the benefits outlined in the leaving service statement, it is likely that professional costs will have been incurred by the trustees in dealing with the complaint or dispute. If the outcome of the dispute means that more pension benefits have to be paid, it may be that, indirectly, the employer will have to fund for these. By providing the option statement during the redundancy process, this issue will either surface when the option statement is first presented to the employee or perhaps never because the waiver has been signed.