When making certain future changes to their pension scheme, employers should keep in mind the requirement to consult with their employees before making the change. In this blog post, we run through the key aspects of member consultations to provide a reminder of what exactly employers need to do, and why they need to do it.
Employers who have 50 or more employees based in Great Britain are subject to consultation requirements set out in the relevant consultation regulations. This threshold is based on the number of employees the employer has, even if some of those employees are not pension scheme members.
If an employer, trustee or other person with the power to make changes to a pension scheme wants to make a “listed change” to a scheme, the employer must undertake a statutory consultation with certain employees. These “listed changes” are set out in regulations, but include closing a scheme to new members, closing a scheme to future accrual, changing members’ accrual of benefits, increasing or introducing member contributions, and changing or limiting the amount of pay that forms pensionable pay.
Before making a “listed change”, employers must consult employees who are or would be affected by the proposed change. This requirements covers both active and prospective members.
The consultation must last for at least 60 days and, if there are existing employee representative arrangements (such as a trade union process), must follow those arrangements.
Employers must provide affected members with notice of the change, along with information in writing as to the effect of the change, any relevant background information, and the timescale for bringing in the change.
Employers, and the affected members, have to work in a spirit of co-operation and to take into account the interests of the person making the change as well as those of the members. Case law on what it means to have a meaningful consultation has shown that consultations must be genuine, open and transparent, and provide members with sufficient information to enable them to consider the change.
Guidance from the Department of Work and Pensions suggests that the consultation should include an exchange of views and the establishment of a dialogue between the employer and the person or persons it consults.
If an employer fails to consult in relation to a “listed change”, or if the consultation is not carried out in line with the statutory requirements, the Pensions Regulator has the power to impose a fine of up to £50,000 against a company and to issue an improvement notice. An employer who does not comply with the consultation requirements and receives a penalty from the Regulator can face reputational damage.
It is worth keeping in mind that members could also bring a claim for a breach of the employer’s duty of good faith in the event that an employer fails to consult them about changes. Trustees may also refuse to exercise the power of amendment if the employer has not met the requirements.