Pension consultation Regulations: FAQs

This week, Ian McDonald of Lewis Silkin concludes a series of articles on the Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006 by answering some frequently asked questions.

What are the implications of the Regulations for employers?

The Regulations require employers to inform and consult on proposals to make 'listed changes' to occupational pension schemes (final salary and money purchase) and to personal pension schemes (such as group personal pension plans and stakeholder pensions) that provide for contributions by the employer in respect of at least one member.

Who must be consulted under the Regulations?

Consultation must be carried out with both 'active' and 'prospective' members of the scheme, not just existing members.

What is an active member?

In the case of an occupational pension scheme, an active member is anyone who is in any type of employment to which the scheme relates and that qualifies the member for a pension or other benefit under the scheme, provided that his or her employment continues for the appropriate period.

In the case of a personal pension scheme, an active member is anyone in respect of whom the employer makes contributions.

What is a prospective member?

In the case of an occupational pension scheme, a prospective member is anyone who: is able (if he or she chooses) to become a member of the scheme; will become eligible to join if he or she continues in the same employment for a sufficiently long period; will automatically become a member of the scheme unless he or she chooses not to; or may become a member of the scheme if the employer consents.

In the case of a personal pension scheme, a prospective member is anyone who, under the terms of his or her employment contract, is eligible to become a member of the scheme and in respect of whom the employer would then make contributions.

What steps must the employer take if a change to the scheme is proposed by a parent company or by pension trustees?

The obligation to consult always falls on the employer, even if it is not the employer that proposes the change. Once the consultation has ended, the employer must report, as soon as reasonably practicable, to the parent company or the pension trustees proposing the change, telling them the views that were expressed during the consultation and giving them a copy of any written responses received. If no views were expressed or written responses received the employer must inform them of that.

The parent company or the trustees must ensure that the employer has complied with the consultation requirements under the Regulations. The final decision about whether or not to make the change rests with the parent company or the trustees proposing the change, but any responses to the consultation must first be considered.

Are employee representatives entitled to time off to perform their duties?

Employees who act as representatives during the consultation process are entitled to time off to carry out their duties as representatives and they are also entitled to be paid for that time.

The Regulations provide that representatives are to be paid at the 'appropriate hourly rate'. If an employee works the same number of hours each week, this is calculated by dividing a week's pay by the number of hours that the employee works. If an employee's hours vary, an average is taken over a 12-week period. If an employee's hours vary and he or she has not worked for the previous 12 weeks, the Regulations state that the calculation used should 'fairly represent' the normal number of hours he or she works in a week.

It should be noted that, if an employee's contract provides for payment in respect of the time he or she takes off, this is set off against any payment due to him or her under the Regulations. Equally, if an employee is paid under the Regulations for his of her time off, this is set off against his or her normal contractual pay. This prevents the employee being paid twice (once as an employee and once as a representative).

What are the consequences for the employer if it refuses to allow a representative to take time off?

If an employee is unreasonably refused time off to act as a representative, or is not paid for that time, he or she can make a complaint to an employment tribunal. If the tribunal concludes that the complaint is well founded, it will make a declaration to that effect and award appropriate compensation. This will be the amount to which the representative is entitled for the time off or the amount to which the representative would have been entitled to if he or she had been allowed to take the time off.

If, as a result of a consultation, a different change is proposed, will further consultation be necessary?

Consultation is required only where there is a proposal to make a listed change. If, following consultation, it is decided to make a different listed change to the one that was first proposed, another consultation will normally need to take place regarding the new change.

There are, however, limited circumstances under which no further consultation will need to take place: where the initial proposal was to prevent the accrual of future benefits under an occupational scheme and the revised proposal is to limit the rate at which they accrue; where the initial proposal was to remove the liability to make employer contributions to an occupational pension scheme and the revised proposal is to reduce employer contributions; and where the initial proposal was to cease employer contributions to a personal pension scheme and the revised proposal is to reduce employer contributions.

If consultation is not carried out properly, what are the penalties?

If consultation is not carried out properly, a complaint may be made by an affected member or an employee representative to the Pensions Regulator. If the Pensions Regulator finds that there has been a breach of pensions legislation, it may issue an Improvement Notice requiring that a particular step is taken, or not taken, to remedy the breach or prevent it from reoccurring.

Failure to comply with an Improvement Notice can lead to a civil penalty of up to £5,000 in the case of an individual or £50,000 in any other situation. The money is paid to the Government rather than to the individual members who were affected by the failure.

Next week's article will be the first in a series on holiday and will look at rolled-up holiday pay.

Ian McDonald is a trainee solicitor in the employment team at Lewis Silkin (ian.mcdonald@lewissilkin.com ).

Further information on Lewis Silkin can be accessed at www.lewissilkin.com.