Employers must consult on changes

New Regulations, taking effect from 6 April 2006, require employers to consult with their staff before making major changes to their pension schemes. And the DWP has published guidance explaining employers' obligations under the new rules. We examine the new requirements.

Summary of key points

  • From 6 April 2006, employers will have to consult with affected scheme members or their representatives for a period of at least 60 days if they wish to make major changes to their pension arrangements.
  • The requirements are being phased in and by April 2008 will apply to private sector employers with at least 50 employees.
  • The amendments on which consultation must be undertaken are prescribed by the Regulations.
  • The Regulations also lay down who may be member representatives and set out procedures to appoint pensions consultation representatives if necessary.
  • A civil penalty may be imposed by the Pensions Regulator for failure to comply with the requirements, but non-compliance does not invalidate any changes made.
  • The DTI has amended its employee information and consultation requirements to prevent conflict with the new consultation Regulations.

The government announced in 2003 that, as part of its "informed choices" policy, it would require employers to consult with affected parties or their representatives before making significant changes to pension schemes. It believed that doing so would ensure that scheme changes are "developed in partnership" with members. It also thought that members' anxieties about future pension provision would be addressed through this process. Using powers contained in the Pensions Act 2004, the Department for Work and Pensions (DWP) has now made Regulations1 requiring consultation to take place before certain scheme amendments can be introduced.

The DWP has published guidance2 for employers explaining when and how the Regulations apply and advising on recommended good practice. It also explains how the pensions consultation Regulations interact with the Department of Trade and Industry's (DTI) information and consultation requirements.

Excluded employers

The key provision of the Regulations is that employers have to consult with prospective and active pension scheme members, or their representatives, before making major changes to their pension arrangements on or after 6 April 2006. The Regulations apply to any relevant employer, the trustees or managers of a pension plan of a relevant employer, and, in a multi-employer pension scheme, any other person who has the power to make one of the listed changes affecting the scheme. They also apply to employers who have in place a personal pension plan where direct payment arrangements exist for at least one member.

There are a number of exclusions from the consultation requirements, including:

  • public service scheme employers;
  • small self-administered schemes;
  • single-member schemes;
  • schemes administered outside the EU; and
  • any employer with fewer than 50 employees, even if the employer is part of a larger multi-employer arrangement.

In addition, the consultation provisions are being phased in over two years for smaller organisations. So from 6 April 2006 to 5 April 2007, the Regulations will only apply to employers with at least 150 employees. In the following 12 months, they will be extended to cover employers with at least 100 employees, and from 6 April 2008, they will apply to organisations with at least 50 employees.

Relevant scheme amendments

Box 1 sets out details of the scheme amendments upon which employers must consult. This list has been slightly modified from the one originally contained in the draft Regulations. The main change is that the draft Regulations specified that an employer under a money-purchase arrangement only had to undertake a consultation exercise if employer contributions were being reduced by a margin of 2% or more, or if they were being reduced to below 3%.

Some respondents to the consultation also suggested that the specific amendment of changing the basis of accrual from final salary to career revalued average earnings should be added to the list of prescribed changes. The DWP has accepted this suggestion, but modified it to the more generic "changing the basis of accrual".

There are certain circumstances in which no consultation is required. These include:

  • where active or prospective members were notified of the change before 6 April 2006;
  • where, following a consultation under the terms of the Regulations in respect of a proposal to stop future accrual under the scheme, a new proposal is put forward to reduce the rate of accrual instead;
  • where, following a consultation in accordance with the Regulations to remove the employer's liability to make contributions, a further proposal is put forward to reduce contributions;
  • any amendments made as a result of complying with a statutory provision; and
  • any change resulting from a determination made in respect of the scheme by the Pensions Regulator.

Consultation process

The employer is required to consult either with the representatives of, or directly with, as many affected members and prospective members as is reasonably practicable. Box 2 contains more information about who should be consulted. Often there will already be an established group of representatives whom employers consult. If there is not, the Regulations provide for the employer to arrange for representatives of affected members to be elected. Although there is no prescribed minimum number of representatives, the DWP suggests that one for every 50 members is appropriate.

Representatives are given employment rights and protections under the Regulations. Originally, these were contained in a separate document, but they have now been added as a schedule to the main Regulations. They include the right to take reasonable time off to perform their functions as representatives and to be paid fairly for this time. If the employer refuses these rights, employee representatives may complain to an employment tribunal.

Meaning of consultation

Written information about the proposed amendments has to be given both to all employees who are affected members or prospective members of the scheme, and to the representatives of such employees whom the employer is consulting with. Box 3 sets out both the minimum information requirements under the Regulations and the DWP's view of the minimum amount of information required. The DWP suggests that using a form of communication that reaches only some of the relevant parties, such as noticeboards, is not sufficient for the purposes of the Regulations.

Originally, the definition of "consultation" in the Regulations included the employer giving advice to affected members. Some respondents considered that this was inappropriate, so it has been amended and now follows the requirement in the DTI's Information and Consultation Regulations (SI 2004/3426) for the employer and any person consulted to work together in a "spirit of cooperation". According to the DWP, this means the consultation will include an "exchange of views and the establishment of a dialogue" between the relevant parties. The consultation period should be at least 60 days.

If no responses are received by the end of the consultation period, the consultation is deemed to be completed. Otherwise, any responses have to be considered before a final decision on the change is made. If the responsibility for making the amendment rests with the trustees or managers of the scheme, the employer must advise them in writing of the results of the consultation and forward any comments made to them. These people must also satisfy themselves that the employer has undertaken the consultation properly.

Interaction with the DTI's Regulations

When the draft Regulations were first published, there was some concern about how they tied in with the DTI's wider Information and Consultation with Employees Regulations. These give employees the right to be informed and consulted about the business they work for, including details of substantial changes in work organisation and contractual relations.

There are some differences between the main provisions of the two sets of Regulations, namely:

  • the DTI's process is triggered either by a formal request from a minimum number of employees or by the employer, whereas the pensions consultation process is compulsory;
  • there is a list of prescribed changes relating to pension schemes which activates the pensions consultation process; and
  • only affected members and prospective members, or their representatives, have to be consulted under the pension Regulations rather than all employees.

To avoid the employer being made subject to two different sets of legal requirements in respect of the same decision, the Information and Consultation Regulations have been amended3 with effect from 6 April 2006 in two different ways. First, employers to whom the standard information and consultation provisions apply will be able to give their employee representatives written notice that they will be consulting on pension matters under the pension Regulations. Second, where a negotiated agreement exists which was made before 6 April 2006 and which contains a requirement to consult on listed pension changes, the employer may similarly give written notice that it is consulting under the pension provisions rather than under the general information and consultation requirements.

Effect of consultation

The DWP's guidance makes it clear that failure to consult does not invalidate any scheme amendment. However, any person who considers that they have a right to be consulted may complain to the Pensions Regulator if they believe that the employer has failed to comply with the Regulations. If the regulator upholds such a complaint, it has the power to impose civil penalties of up to £50,000 on a company and up to £5,000 on an individual.

The regulator also has the power to waive or relax the employer's statutory obligation to consult. The employer may apply to the regulator, giving reasons why a delay in introducing the amendment would be detrimental to members' interests. The example given in the guidance is any delay that would adversely affect the company's ability to remain solvent. If the regulator agrees, it will use its determination procedure to waive the consultation requirements.

Our research

This feature is based mainly on the Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations and the accompanying guidance produced by the DWP.We have also made use of the report issued by the DWP on the responses to the consultation on the draft Regulations and an internal report prepared by John Wilson at HSBC Actuarial Consultants Ltd.

Box 1: Changes upon which employers are required to consult

1. Changes that apply to all occupational pension schemes

  • Increasing the normal pension age.
  • Closure of the pension scheme to some or all new members (but active members are remaining in the scheme).
  • Stopping future accruals in the scheme to some or all active prospective members.
  • Removing the employer's liability to make contributions to the scheme.
  • Introducing contributions for some or all of the scheme's members where there had not pre-viously been a scheme contribution.
  • Increasing the rate of contributions paid by some or all of the members.

2. Changes to occupational pension schemes that provide money-purchase benefits

  • Reducing the employer contributions to the scheme in respect of some or all of its members.

3. Changes to occupational pension schemes that are not money-purchase arrangements

  • Amending the scheme to provide some or all of the benefits on a money-purchase basis.
  • Changing the basis for determining future accruals.
  • Modifying the accrual rate for future benefits.
  • Otherwise reducing the accrual rate.

4. Changes that apply to personal pension schemes

  • Removing an employer's contribution.
  • Reducing the employer's contribution.
  • Requiring an increase in members' contributions to the scheme.

Box 2: Who has to be consulted?

  • Active members who may be affected by the proposal to amend the scheme, or their representatives.
  • Employees who have not joined the scheme, but who are, or will be, eligible to do so (prospective -members), or their representatives.

Representatives may be:

  • recognised trade unions;
  • information and consultation representatives;
  • existing pensions representatives appointed under the procedures within the Regulations; or
  • if none of these arrangements exist in respect of some or all of the affected members, represent-atives that the employer has arranged to be elected to represent these affected members.

Note: Retired and deferred members are not covered by the Regulations.

Box 3: Minimum information to be given to affected members and their reps

1. In accordance with the Regulations

  • A description of the proposed scheme change.
  • Its likely effect on the scheme and its members.
  • Relevant background information.
  • The effective date of the amendment.

2. Suggested by the DWP guidance

  • The total number of prospective and active scheme members that are affected by the amendment.
  • An explicit statement of the categories of members excluded from the change.
  • Worked examples illustrating the effect of the proposed change.
  • The date on which the change will take effect.
  • General information on the role of the Pensions Regulator in overseeing the consultation requirements.

1 Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006 (SI 2006/349) and Occupational Pension Schemes (Consultation by Employers) (Modification for Multi-employer Schemes) Regulations 2006 (SI 2006/16), available from the OPSI website (www.opsi.gov.uk) via "Legislation", "UK", and "Statutory Instruments" and then using the SI numbers.

2 "Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006 and Occupational Pension Schemes (Consultation by Employers) (Modification for Multi-employer Schemes) Regulations 2006: DWP guidance", available from the DWP website (at www.dwp.gov.uk).

3 Information and Consultation of Employees (Amendment) Regulations (SI 2006/514), available from the OPSI website (www.opsi.gov.uk) via "Legislation", "UK", and "Statutory Instruments" and then using the SI numbers.