Closure of DB scheme

mambojambo51

Can anyone answer this question for me: Is there different responsibilities for a company to close a DB scheme "off it's own back" or if it is voted out by the employees of the company?

Thanks

benalder284

I think you may need to clarify what you mean - why would employees vote to close down a DB pension scheme and how would they do this?

jamesd

In general employees don't get a vote in such decisions.

If the pension scheme is specified in employment contracts it could take a change of employment contract to change the scheme. But companies are in general unlikely to make their pension contributions a binding part of an employment contract because they know that these things get changed.

For employees to organise and vote to get rid of a final salary scheme would in general be very foolish and unnecessary because employees can normally choose not to be a member if that is what they want.

mambojambo51

I can understand the confusion in my original question and thanks for your replies.

The DB pension at my company was closed to new entrants 4 years ago and the union is about to ballot its members to make changes to the DB pension scheme but are allowing all employees to vote. Eventually the number of people in the company that are not in the DB scheme would outnumber the people who are and we are worried they may decide to "pull the plug" on our DB pension?

Hope this makes it a little clearer and i will check in to my employment contract thanks.

GhIFA

Sorry, but can you give some further clarification - the union is organising a ballot to make changes to the DB scheme? What are the changes? Are the union proposing the changes? or are the Trustees, and the union want a vote on these proposed changes? It's still a little bit unclear what you are actually wanting opinion on.

jamesd

Depends what you mean by pull the plug on your DB pension.

The company cannot pull the plug on meeting the payout obligations to existing members, except when going bankrupt or to limited extend similar issues in sale of a business that is not a long term going concern. This is for two reasons:

1. The company pays money to the pension scheme and that is independently managed by its trustees, for the benefit of the members of the pension scheme. The company has no access to this money.
2. The Pension Regulator compels companies to top up their payments into the pension fund so it's sufficient to meet obligations, though over timescales of a few years to a decade or so it's possible for there to be accepted projected excess or shortage. In more uncommon case a company that has become much smaller might be unable to pay and the regulator may accept the limitation or the Pension Protection Fund may cause the pension scheme trustees to acquire ownership of the whole company so it can be run for the benefit of the pensioners.

The company can choose to close the defined benefit pension to the existing members of the scheme, not just to new entrants. That won't affect existing benefits but will affect future ones, including future pay rises and their effect on payout levels.

A company is most likely to want to do that when it can predict increased future financial contributions that seem excessive compared to the benefit to the company of providing this workplace benefit for employees. The most effective way to reduce this possibility is for the employees and trustees to work with the company on arrangements to do things like managing some split of who pays for such things as the cost of increased life expectancy, so that doesn't fall solely on he company. This means higher short term costs for employees but beats closing the scheme and losing future accruals.

If the number of active members falls to a sufficiently low level the administrative cost of running the open scheme might become excessive. Then for efficiency the company may want to close it, just because the costs exceed the value by too much.

As well as that, yes, eventually the company might find it more efficient to offer just one pension scheme and might want to withdraw it for that reason. Members of the defined benefit scheme could negotiate for higher payment rates by their employer to cover their reduced entitlement. Maybe 16-20% employer contribution compared to perhaps 6-8% for new employees who start on pay and conditions based on those lower pension payroll costs.

One of the easiest ways to lose a DB pension is to have a union that's unduly focused on retaining contribution levels and making the employer pay the full costs of increased life expectancies. That sort of think is the kiss of death to such schemes and the employer is far more likely to close the scheme instead to avoid those uncontrollable higher future costs.

If your union is doing something like proposing higher member contributions related to increasing life expectancy you should support that move and encourage others to do so, as the best way to keep the DB scheme going.

mambojambo51

Thanks once agin for your prompt and extensice replies. I know that i have not given all the information but its just that it is way too much to type!

In short to cover some of the questions/points raised....the union and management are jointly suggesting to the trustees a number of points but this is also going to a vote to ensure the union has the backing of its members to proceed. Some of the main points of change are having a cap on pensionable pay rises and a change in indexation (although the indexation issue will lie mainly with the trustees). As far as i am aware we are not allowed to make increased contributions as this has been suggested in the past. The company is very profitable and has been making large dividend payments over the last 4/5 years.

My question, although the whole pension issue is complex, is does the company have any added responsibility to compensate its pension scheme members (above the monies that arepaid in and safeguarded) if it decides the pension fund is unsustainable as opposed to the employees of the company voting in favour (through a union vote) to agree to change to a single DC pension scheme?

Thanks for any further help you can give....

MJ51

jamesd

The company has no obligation unless it's part of the employment contract. Then it's a matter for negotiation between employer and employees, with the employees unwilling to accept the offer able to leave the company if they are not satisfied with the best available offer.

Limiting pensionable pay rises is probably worse for the employees than higher pension payments but the effects are harder to understand than higher pension contributions so it might be accepted by employees who don't recognise how much it's costing them.

It's good that the company is profitable, that at least protects against the PPF case. A profitable company doesn't mean that it can't try to become more profitable by trying to reduce payroll costs through less costly or less likely to increase pension liabilities.

If there was to be a change to a DC scheme it would be for the employees or their representatives to try to ensure that the employees in the DB scheme do not suffer a large reduction in their pay and benefits package. A switch to say a DC scheme with 6% employer match if the DB is getting more like 20% would be such a cut. That higher pension cost in DB would have been paid for with lower salaries or other benefits for the employees, so some way to avoid an overall cut would be needed.