Rising deficits and shrinking confidence have resulted in many employers deciding to close their final salary pension schemes to new entrants.

Whilst such a change is likely to lead to a considerable financial saving, there are many considerations which must be taken into account when making such a decision. These include:

  • The impact on the employer's ability to recruit premium employees when they will not be offered membership of a final salary scheme;
  • Compliance with the formalities in the trust deed and rules governing the pension scheme;
  • The way in which the change is communicated to existing scheme members so as to reassure them that their benefits remain safe;  
  • Where employees have a contractual right to join the final salary scheme under their contracts of employment, the employer must arrange a review and amendment of future employment contracts; and
  • Consultation requirements.

The list above is clearly not exhaustive. This article focuses on the last point: Consultation.

The Employer Consultation Regulations require an employer who has 50 or more employees to consult all affected members and prospective members of the pension scheme in relation to the change. The scheme rules must be checked to determine which employees must be consulted.

The consultation period must last for a minimum of 60 days and must not merely consist of the provision of information – the employer must provide contact details to which any responses may be directed, and must consider these responses before making a final decision.

Whilst the duty to consult lies firmly with the employer, the trustees of a pension scheme are subject to the provisions of the Consultation Regulations in that the trustees must satisfy themselves that the employer has complied with the consultation requirements. The trustees must satisfy themselves about this prior to facilitating the closure of the scheme to new members, e.g. by entering into a deed changing the scheme rules.

While the consultation requirements have been in force since April 2006, they have been given more force from April 2009 in that the Pensions Regulator can now impose fines of up to £50,000 on an employer.