Next in our back to basics series we share our insight on pension consultation - the requirement for employers to consult where certain changes are proposed in respect of employees' pension arrangements.

Key action points for employers

1. You need to consult if you are making a listed change

The legal duty to consult in respect of pensions arises if the employer is proposing to make a 'listed change'. This includes things like closing an occupational pension scheme to new members, increasing the normal pension age and stopping the accrual of benefits for existing members of a pension scheme.

2. Both occupational and personal pension schemes are included

The requirement to consult applies in respect of both occupational pension schemes and personal pension schemes that the employer contributes toward. There are separate listed changes which affect occupational pension schemes, changes affecting defined benefit schemes, changes affecting defined contribution schemes and changes to personal pension arrangements. There are also some exempt changes where consultation is not required.

3. Consultation is with affected members

The employer must consult with 'affected members' (or their representatives). This includes employees who are active members or prospective members of the scheme.

When is pension consultation required?

Employers who are proposing certain changes in respect of pension arrangements have a duty to consult with employees.

The requirement applies in respect of both occupational pension schemes and personal pension schemes that the employer contributes toward.

Are all employers covered?

No. The duty applies to employers who have 50 or more employees in Great Britain. Importantly, this refers to the overall number of employees, not the number of pension scheme members.

There are certain employer exclusions, the most common being those who participate in schemes which have fewer than two members or those who have unfunded/employer financed schemes.

What changes require consultation?

Consultation is necessary if a proposal involves a 'listed change'.

There are separate lists for changes which affect occupational pension schemes, changes affecting defined benefit schemes, changes affecting defined contribution schemes and changes to personal pension arrangements. There are also some exempt changes where consultation is not required.

The listed changes include:

  • Changing employer or employee contribution levels for any type of scheme; and
  • For occupational schemes:
    • Increasing the normal pension age;
    • Closing the scheme to new members;
    • Stopping or changing future benefit accrual for existing members;
    • Changing the basis of future accruals, such as moving from final salary to career average arrangements;
    • Changing the elements of pensionable pay;
    • Changing the rate at which payments are increased or the rate at which deferred pensions are revalued, for example, switching from RPI to CPI.

There are also certain changes where consultation is specifically not required. These include:

  • Changes to comply with the law or a determination of the Pensions Regulator;
  • Implementation of new adjustment measures;
  • Certain changes to address the removal of contracting out;
  • Minor or administrative changes with no lasting effect on admission or benefits

Who does the employer have to consult with?

The employer must consult with 'affected members' (or their representatives). This includes employees who are active members or prospective members of the scheme.

Unlike other forms of consultation, the employer has some choice as to who it consults with:

  • Where the employer has existing arrangements for representation in place it must consult using one of those forums but if it has more than one available option (such as a recognised union and employee consultation committee) then it can choose.
  • If the employer does not have an existing arrangement then it can choose to appoint representatives or consult with employees direct.

What does the consultation involve?

Employers are required to provide information about the proposals directly to all employees who are affected members and to any representatives who are to be consulted.

In brief, the information to be provided by the employer should:

  • specify the listed change;
  • explain the expected effect on the scheme and its members;
  • set out the anticipated timescale for introducing the change; and
  • include any relevant background information.

The employees/representatives must be provided with an opportunity to review the material and give their views to the employer on the impact of the listed changes.

Consultation should be conducted in an open and transparent manner. Both parties are required to consult in a 'spirit of cooperation', which means that both employer and affected members/representatives should take the other's interests into account.

Subject to that, the employer must give genuine consideration to the responses received but there is no requirement for proposals to be agreed and the employer is not obliged to change its proposals simply because the employees do not like them.

If it is the trustees or another person who will be making the changes then the employer must share consultation responses with that person.

Is there a minimum consultation period?

Yes, consultation must take place for a minimum period of 60 days and no final decisions regarding the change should be made during that time.

What if the proposals change - is it necessary to go through the whole process again?

One outcome of the consultation is that the employer might alter its initial proposals in light of feedback from the members. This could however put the employer in the unenviable position of needing to start consultation all over again in respect of the new proposals.

However, there are two specific circumstances where further consultation does not have to happen:

  • where the employer consults on a proposal to stop further benefit accrual and following consultation proposes instead to reduce the accrual rate; and
  • where the employer consults on a proposal to stop making contributions to a scheme and following consultation proposes instead to reduce its contribution rate.

Is there any guidance?

The Pensions Regulator has issued guidance for employers on the duty to consult on scheme changes. The guidance provides information to help employers comply with their legal requirements, and is a useful reference point for those employers who are considering pension scheme changes.

What about multiple employers?

Specific arrangements are in place to deal with multiple employer schemes. In brief, the arrangements require that other relevant employers are notified and those employers are then obliged to consult with any affected members they employ.

What are the consequences of getting it wrong?

The Pensions Regulator can take action where an employer has breached the statutory requirements. Potential consequences include:

  • a fine of up to £50,000 against an employer who has failed without reasonable excuse to comply with the requirements;
  • issue of an improvement notice specifying steps to be taken to remedy the breach or avoid a recurrence.

Constructive dismissal claims are also possible if an employee resigns in response to a pension change made without any consultation.

Importantly, any changes introduced where consultation has been defective will remain valid.

Top tips to manage pension consultation effectively

1. Planning, planning and more planning

It will often be the case that pensions consultation is one part of an overall project to introduce pension scheme changes and other forms of consultation might also be needed. For example, if it is necessary to make contractual changes then, depending on the numbers involved and the approach towards implementing those changes, collective consultation could also be required. Plan this from outset and it will save you time and pain.

2. Think about your representatives

An unusual feature of pensions consultation is that the employer has some discretion as to who it consults with. Factor this into your planning and think about putting an ICE compliant employee representative forum in place to facilitate consultation.

3. Avoid damaging employee relations as far as possible

Communications are key. Be clear on the business rationale for the changes and make sure the figures stack up. You will need a clear rationale to win the employees over, reducing the risk of constructive claims or industrial action.

4. Is there a risk of strikes?

For a unionised business - consider how likely the risk of industrial action is. What changes are proposed? How will the changes be received by the workforce? What other changes (if any) are taking place across the business? Think about how you'll respond if industrial action is threatened and contingency plan.

5. TUPE protected terms

Watch out for terms and conditions that have been inherited following a TUPE transfer. As we explored in our podcast changing TUPE protected transferred pension obligations can be problematic. Investigate the origin of terms and conditions so that you're prepared for any challenge and consider how you will address TUPE issues if present.

6. How will you communicate your message?

What information channels will you use during the consultation process? Consider publishing regular updates, communications and FAQs which can be accessed directly by the employees. This will enable you to keep control over the messages the employees are hearing and limit the opportunity for distortion by relying on employee representatives to facilitate communication. You can also control the message by paying attention to the tone and format of these communications.

7. If you are seeking consent, get informed consent

Take care if you are seeking consent to pension changes as an outcome of the consultation process. Allow consultation to run its course before obtaining consent. To ensure that consent is 'informed consent' you must be very clear about the impact of the changes on the employees and the consequences if they consent.

8. Consider the role of Independent Financial Advice

Take care not to give financial advice to employees as part of the consultation process. In appropriate circumstances, particularly if you are asking them to make a choice as an outcome to consultation, you might want to consider arranging access to an IFA and/or paying for them to obtain advice.

9. Get Trustees involved early

Involve them from an early stage. In some instances they may instigate the changes. In others, you will need them on board to make sure things run smoothly.