Company forcing pension change on Employees

brd888

Hello,
I am wondering if my employer is entitled to change conditions of the company pension scheme.
I currently have a final salary pension which I contribute 5% of my pay toward and the company also contributes to.
They currently say they can't afford to continue this scheme in it's current form. We are being told we have two choices:
1. Stay in the final salary pension which requires employees to contribute a further 7% of their pay toward (on top of the exisiting 5%). This can increase in the future.
2. Move to their new scheme which is unconnected to final salary. It is simply a pot of money which employees contribute to and the company matches. There is no guarantee of what you will receive when you retire.

The change is designed purely to save the company having to meet a shortfall in the current pension scheme. Are they entitled to force change upon us?

Regards.

MrChips

In short, yes, they can do this. There are regulations that say they must consult the workforce over changes like this - but nothing to stop them then changing your pension scheme for the build up of future benefits.

Your past service pension is protected from adverse changes, so long as the company can afford to keep its promise. If not, the PPF safety net is there.

Unfortunately, many companies are going down this route at the moment and it is increasingly common for final salary schemes to be closed and replaced with inferior money purchase arrangements. Is your company offering pound for pound matching? Your current final salary pension probably involves the company paying about 15% towards your pension for every 5% you put in, i.e. 3 to 1 - quite a drop to move to 1 to 1, and you should expect a correspondingly sharp fall in your expected future pension if you go for a 5% contribution to option 2).

What is best for you will depend on many factors including age, how much pension you have already built up, the prospects for the company, etc...

Individual advice may be the way forward - the company may be willing to pay for it seeing as they are forcing this situation on you.

dunstonh

The change is designed purely to save the company having to meet a shortfall in the current pension scheme.

On part yes. Final salary schemes are effectively an open cheque book and companies dont like that sort of liability.

inmypocketnottheirs

Whilst I am certainly no expert on the subject and would defer to someone with better knowledge, my understanding is if a Final Salary scheme is in the contract of employment, then it can not be varied without consent.

I stand to be corrected of course as always!

MrChips

I'm not a lawyer, but based on the number of schemes which are closed each year, I doubt this can be the case. Of course it's possible that in such examples the scheme wasn't in the contract of employment.

Either way, benefits accrued to date are protected by law from adverse changes without members' consent. Future benefits have not been promised yet (in most cases) so can be amended.

movemysuper

well, the pension schemes for a company may gets changed but it should not hamper the retirement benefits of the employees.

Superannuation

inmypocketnottheirs

MrChips wrote: »

"I don’t like evidence and facts. They tend to undermine my arguments. I prefer to rely on dogma and blind prejudice."

Great signature!

MikeJones_2

Hi brd888

MrChips has pretty much nailed this one but I thought I'd add some meat to the bone.

brd888 wrote: »

I am wondering if my employer is entitled to change conditions of the company pension scheme.

Yes, subject to consultation (see below).

brd888 wrote: »

We are being told we have two choices:
1. Stay in the final salary pension which requires employees to contribute a further 7% of their pay toward (on top of the exisiting 5%). This can increase in the future.

Think about your pension as your 'wages' in retirement. With average life expectancy rising, a final salary type pension will be a very valuable commodity if the scheme can continue to move forward.

And don't forget that you will have tax relief on the additional 7% contribution.

The Police Pension Scheme has a relatively high member contribution rate (of around 11%) compared to the current majority of defined benefit schemes - but you seldom hear a policeman complain about it. This is largely because the scheme communicates to its members just how good the pension is for what they are paying into it as employees.

brd888 wrote: »

2. Move to their new scheme which is unconnected to final salary. It is simply a pot of money which employees contribute to and the company matches. There is no guarantee of what you will receive when you retire.

If you can afford the additional contribution for the final salary scheme, then there is no comparison in terms of what you'll get at retirement. The final salary scheme should produce a much better pension and retirement income. This assumes there is no change to any part of the scheme formula, such as accrual rate, pensionable salary and final pensionable salary. These changes, if they happen, can be subtle - but might have a significant impact, so you're best to be familiar with what you've got.

brd888 wrote: »

The change is designed purely to save the company having to meet a shortfall in the current pension scheme.

Most people don't realise that there are two elements which can make up a scheme deficit (i.e. whether the liabilities of the scheme exceed its assets).

The first is a 'past service' deficit. It's pretty much what is implies but is best explained by saying that this element of a deficit has arisen for pension benefits that have already been promised such as your current pensionable service that you have already build up to date as an active member. It might/probably have also been caused by pensions promised to preserved members (those that have left the scheme but that have not yet retired) as well as pensioner members.

Increased life expectancy is one of the biggest drivers for this element of the deficit as scheme members are living significantly longer than was anticipated when schemes started (on average life expectancy increased by 2 years for each decade of the 20th century). Imagine having to pay your mortgage 2 years longer than you'd planned for every 10 years you'd taken it out for and you'll get some idea of the problem employer's providing a defined benefit scheme are facing.

One employer that I know of is paying £75,000 per month extra just to counter its past service deficit on a scheme of around 300 members. That's a lot of profit being mopped up.

The second is 'future service' deficit and may too be caused by increased life expectancy. However, other factors such as active members retiring on potentiall much higher pay than was initially anticipated contribute to a future service deficit (e.g. where a burgeoning management structure has meant more poeple may be paid much greater salaries, upon which their pensions are based). A future service deficit is usually identified at the scheme review in terms of:

'x' is what your current employer monthly contribution is which was based upon the assumptions used at the last review but
'x' plus 'y' is what you now need to pay to match the projected pension benefits payable in the future (because the assumptions have changed, for example).

This is not to forget that the basis for calculating scheme solvency has changed over the years and assumptions have (generally) become more conservative - which makes for greater deficits (or smaller surpluses).

brd888 wrote: »

Are they entitled to force change upon us?

Legislation states that the pension scheme’s sponsoring employer would have to go through a consultation process (required where the number of employees is greater than 50) rather than on the number of 'active members'. The 60-day consultation period would be in addition to any other HMRC contracting out requirements (i.e. another 30 days.)

The legislative changes were included in the Pensions Act 2004 with further details confirmed in The Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendments) Regulations 2006, and The Occupational Pension Schemes (Consultation by Employers) (Modification for Multi-employer Schemes) Regulations 2006.

The Statutory Instrument is 2006/349, and there is associated DWP Guidance available (follow the link and scroll down to No.349).

Note that the requirement is to consult; once the process is over (minimum of 60 days must be allowed), the employer is free to make whatever decision he likes about the proposed changes - they do not require the members' consent. The requirements for the consultation process (set out in the Regulations) are pretty convoluted, so it would not be difficult to make a mistake and invalidate the exercise.

inmypocketnottheirs wrote: »

Whilst I am certainly no expert on the subject and would defer to someone with better knowledge, my understanding is if a Final Salary scheme is in the contract of employment, then it can not be varied without consent.I stand to be corrected of course as always!

I agree with this statement. Whenever an employer asks me about the effect of changing benefits in a defined benefit scheme my stock answer includes:

The Employment Law element is the one that may potentially cause problems as an employee’s Contract of Employment (or previous employee correspondence) may have specifically referred to pension entitlement as ‘final salary scheme’ type.

Given the potential for disputes, it would be sensible for any employer to seek professional advice for both categories (pension law and employment law). The advice should be obtained separately to any which the Trustees seek.

.........

Sorry about the lengthy reply, just thought I'd add my twopennyworth to the post.

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

payless

Great input Mike

have you views on firms that have already moved from fs to dc , now looking at breaking the final salary link on accrued f/s service for continuing emploees

MikeJones_2

Thanks payless,

payless wrote: »

...have you views on firms that have already moved from fs to dc , now looking at breaking the final salary link on accrued f/s service for continuing emploees...

Yes, I have plenty of views, but I try to keep my post to factual information rather than expressing personal opinion! It's just the way I prefer to post, personally.

I'm intrigued though. Are you referring to:

(a) a defined benefit scheme which has closed to new members, offering all new employees a money purchase alternative, but allowing existing active member of the DB scheme to continue accruing future pensionable service?

(b) a defined benefit scheme which has closed to all members, offering all new employees a money purchase alternative, but allowing existing employees who were active members before the closure to continue accruing benefit increase by way of their pensionable salary continuing to increase up to NRD?

I ask for the clarification because there are more and more 'ingenius' solutions coming to the fore in terms of employers seeking to limit the liabilities and risks associated with running a defined benefit type scheme, and I want to be sure I've understood your question correctly.

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

payless

assume is teh 2nd one

DB scheme closed to new and existing members a few years back... ( all given option of a money purchase)

those members of the old scheme still in employment currently benefit from the calculation ( of the years earned in old scshme) being based on actual final salary rather than RPI . Employer looking at breaking this link - guess not a massive difference to those who's earnings are likely to grow inline with rpi, but for those will big promotions likely ( or already if they can backdate break ? ) I guess it could be a BIG difference.