Welcome to our second Nabarro Clarity Guide. This Guide looks separately at what questions Employers and Trustees should consider and what issues are likely to arise when an Employer proposes changing a scheme’s benefit structure – in particular, if the proposal relates to ceasing or reducing the rate of future accrual.

Employer’s duties

The Employer must ensure that it does not act contrary to its duty of good faith. This duty requires employers to act in a manner that is not “calculated or likely to destroy or seriously damage the relationship of confidence and trust between Employer and employee” (Imperial, [1991] 2 ALL ER 597).

Power of amendment

Does the Employer have the unilateral power to make the benefit changes it wants? If not, who does the Employer need to obtain consent from – the Trustees and/or members? Even if the power of amendment is exercisable by the Employer alone (without any express reference to the Trustees), section 67 of the Pensions Act 1995 requires the Trustees to consent to the change if the change is a “regulated modification” for the purposes of section 67. See also Employer’s duties.

Formulating the proposal

The Employer should take legal and actuarial advice to prepare a detailed proposal setting out the changes to put to the Trustees. The proposal should cover employment aspects (see below) and anticipate the Trustees’ questions and concerns.

The Employer should review active members’ contracts of employment to check if they have entrenched contractual rights to accrue defined benefits and/or to final salary linkage.

The proposal should state: how the changes will be implemented; whether the Trustees’ consent is needed; whether the employees’ agreement will be sought; why the Employer is proposing the change; what alternatives were considered; and anticipate the Trustees’ concerns around scheme funding.

The Employer should consider whether it will meet the Trustees’ costs incurred in connection with the proposal.

Consultation

Employers must consult with affected members (NB: this class may be wider than you think) and recognised unions, information and consultation representatives or others as may be required by the Consultation by Employers Regulations in relation to prescribed “listed changes” before making any decision to change scheme benefits. Listed changes include closing a scheme or a section of a scheme to future accrual or new entrants; introducing for the first time or increasing member contributions; changing or reducing the rate of future accrual; and changing the meaning of pensionable pay. The minimum consultation period is 60 days and the Regulator has said that it expects the employers to “carry it out in good faith, taking all responses into account”.

If the Employer is varying employment contracts or asking members to opt out of scheme membership (e.g. to break final salary linkage), it may have to dismiss and re-engage “refusniks”, and consultation under the Trade Union and Labour Relations (Consultation) Act 1992 may be needed. Depending on the number of employees potentially affected, the consultation period is either 30 days or 90 days.

Arrangements outside the scheme

The Employer may ask its employees to enter into an agreement to vary the benefits to be provided under the scheme. An employee who enters into a separate agreement with the Employer to vary his benefits under the scheme may not claim different benefits from the scheme at a later date (South West Trains v Wightman,[1998] PLR 113).

Where a separate agreement purports to override restrictions in the scheme’s amendment power, the Employer will need to ensure that the employees gave “informed consent” to this (IMG v German [2009] EWHC 2785).

Conflicts of interest

Any actual or potential conflicts of interest and/or duty should be identified and addressed (e.g. by temporary withdrawal from the Trustee decision-making process) on receiving the Employer’s proposal.

Trustee duties

Trustees must act in the best interests of the beneficiaries of the scheme, but this does not mean the Trustees should frustrate the Employer’s plans (who is also a potential beneficiary in law).

The Trustees should check that none of the proposed benefit changes breach the statutory amendment restrictions in section 67 of the Pensions Act 1995.

Power of amendment

If a scheme amendment is proposed, what power do the Trustees have under the power of amendment in the scheme rules?

Do the proposed benefit changes fall within the power of amendment? Are there restrictions and/or protections that may prevent certain changes to members’ future service benefits by rule amendment?

Section 67 of the Pensions Act 1995 protects members’ accrued rights and entitlements and the proposed amendment must also be considered in light of its requirements.

If the proposal involves closing the scheme to future accrual, can the link with final salary be broken? (so called Courage amendment powers can be tricky to spot)

What formalities must be observed when exercising the power, for example is actuarial advice or a deed required in order to ensure the change is valid?

Documentation and scheme administration

Any deed of amendment to implement the proposed changes will need to be prepared and agreed in advance of the implementation date. The actuary should be ready to provide such actuarial confirmation and/or certificates as may be required.

The Trustees should give the administrator advance notice of the proposed changes so its system and records can be updated.

Trustees will need to ensure that information is given to scheme members to meet the statutory requirements under the Disclosure of Information Regulations.

Scheme funding and investment

The Trustees should consider reviewing the scheme’s funding arrangements following the changes. For example, would it be appropriate to carry out an updated actuarial valuation and/or review the current schedule of contributions?

The Trustees should also review the scheme’s investment strategy and update the statement of investment principles, if necessary, after obtaining appropriate investment advice and consulting with the Employer.