Legacy DB Pension Being Removed – What Are Our Options?

WhiteTiger_26

Hi everyone,

I’m hoping to get some independent views on a situation affecting a small group of long-serving employees.

Our employer closed its Defined Benefit (DB) pension scheme to new entrants many years ago, with all new employees joining a Defined Contribution (DC) scheme instead. Existing members remained in the DB scheme, and it has continued as a closed legacy arrangement ever since.

The employer is now proposing to remove the remaining DB members from that scheme and move everyone onto a DC arrangement. A one-off payment is being offered if employees agree to the change, but many of us believe it falls well short of the value of the pension benefits we would be giving up. Fire and rehire for those who don’t accept!

The employer says the change is about fairness and sustainability. However, from our perspective, the DB scheme has already been closed to new entrants for many years, so future liabilities have naturally reduced over time as staff have left. The remaining DB members are a small, shrinking group.

Those of us affected are trying to understand our position and make informed decisions. We are receiving support from our trade union, but I’d also appreciate independent views from people with experience in pensions or employment matters.

Some questions I have are:

● Have others experienced an employer trying to remove a legacy DB scheme in similar circumstances?

● Is it common for employers to offer compensation, and how is it usually assessed?

● Should compensation reflect each individual’s projected pension loss rather than everyone receiving the same amount?

● Are there examples of employers agreeing alternative arrangements, such as enhanced DC contributions or transitional protections, instead of simply ending DB membership?

● Are there any organisations, specialists or resources you would recommend that employees in this situation should speak to?

I’m not looking for legal advice specific to my employer, and I’d rather not identify the organisation while discussions are ongoing. I’m simply trying to understand what is considered normal practice and what options people have seen work in similar situations.

Thanks in advance for any thoughts or experiences.

DRS1

A lot of private sector employers would have taken this step years (even decades) ago.

It is almost certainly not a direct comparison but I remember University staff going on strike because of proposed changes to the USS. I can't remember how successful that was.

As well as talking to the union, talk to the trustees of the DB scheme (maybe there is a member nominated trustee you could collar?). Oh and definitely talk to the union (and its lawyers) about the fire and rehire threat. Would the employer really go through with that?

Some enhanced DC contributions may be a runner - but if you got them then don't expect the one-off compensation payment on top.

flaneurs_lobster

At the very least, the Pensions Regulator would need to be informed.

The Trustees of the scheme are the people who should take responsibility here.

Threatening to sack people who don't want to sign away accrued pension rights? Sounds like a fun employer (who is almost certainly acting illegally).

DRS1

Threatening to sack people who don't want to sign away accrued pension rights? Sounds like a fun employer (who is almost certainly acting illegally).

I don't think that is what they are doing. They are simply trying to put future service in the DC scheme instead of the DB scheme. These employees would still have the DB scheme for past service (so no signing away of accrued pension rights). That is perfectly legal. Firing and rehiring may be a legal way to put the employees on the same terms and conditions as the ones already in the DC scheme. But it does seem a bit extreme and I am not sure the employer would actually do it (or the implied fire and NOT rehire option)

Tree_pipe99

I was in this situation quite a few years ago.

The deal ended up being enhanced employer contributions into the new DC pension. From memory, it was something like 22% for the first 3 years and then 14% ongoing after that. Employee contributions remained at 10% throughout.

Triumph13

I went through a similar process 20+ years ago. Position then was employer could do what they wanted re future service (may be different in your case depending on contract of employment), but couldn't touch accrued rights without member agreement.

They offered us the bribe of enhanced contributions in exchange for agreeing to break the final salary link for past service, uplifting by inflation instead.

We managed to negotiate some increases to the enhancement, but that was about it.

MarlowMallard

With regard to the USS changes noted above : there were several steps….
In 2011 the final-salary scheme was closed to new entrants, new joiners were put onto CARE career-average revalued earnings (at 1/75 per year), current members stayed on FS (but with a cap so salary above about 75k went into DC). No strike.
In 2016 the final-salary scheme was frozen completely, accrued benefits were preserved (but rated to best salary of recent few years, not future final salary), future service was accrued as CARE, no strike.
In 2018/19, there were further changes including much worse inflation-linkage, there were strikes and the changes were watered down.
In 2020/1 the scheme was revalued at the depth of COVID and a large "deficit" appeared, more adverse changes and more strikes. After end of COVID and higher interest rates, the deficit disappeared and things rolled back quite similar to 2019 rules.

QrizB

I went through this a decade or so ago. We (staff via our union) managed to negotiate a higher employer contribution to the new DC scheme - nothing like the 22% / 14% mentioned above, but 2-3% more than the employer was originally offering.

There was nothing offered in the way of compensation, and the union wasn't able to negotiate anything along these lines.

It's an ill wind that blows no good; closure of the DB scheme was the spur to make me look properly at my retirement planning, the eventual result of which is me intending to retire eight years earlier than the DB NPA. So it indirectly helped me 😎

WhiteTiger_26

I completely appreciate the distinction between accrued rights and future accrual, and I agree that the benefits already earned remain protected.

Our concern isn’t that accrued pension rights are being taken away. It’s that long-serving employees are being required to give up future DB accrual under the threat of dismissal and re-engagement if they don’t agree.

Another important point is that many of these employees accepted lower salaries over the years because the Defined Benefit pension formed a significant part of their overall remuneration package. For many, it wasn’t simply an employee benefit, it was a key reason for remaining with the organisation. In some cases, the pension was actively relied upon as an incentive to retain experienced staff during periods of organisational change and restructuring.

What sits with many of us is that our employer closed the DB scheme to new entrants over a decade ago. Since then, new employees have joined a DC scheme while the remaining legacy DB members continued in the existing arrangement. Given that two schemes have successfully operated side by side for many years, it’s difficult to understand why removing the remaining legacy DB scheme has now become necessary in the name of “fairness.”

The issues that many of us remain concerned about are:

• Whether the consultation process has been meaningful, fair and legally compliant.
• Whether all realistic alternatives to removing future DB accrual were genuinely explored before reaching this decision.
• Whether the financial impact on each affected employee has been individually assessed, given that losses vary significantly depending on age, length of service and proximity to retirement.
• Whether the proposed compensation fairly reflects the potentially substantial and differing long-term pension losses individuals will experience.
• Whether dismissal and re-engagement is a reasonable and proportionate response when the affected employees are a small, shrinking, ring-fenced legacy group.

I’d genuinely be interested in hearing views on whether those factors would be relevant when assessing whether this process has been fair and reasonable.

Thanks

Cobbler_tone

I can share a similar experience and the outcome.

After consultation/negotiation (with employee reps/unions), the outcome was an offer of £7,500 cash in year 1 and year 2 called a taxable 'transition payment', or £8,500 in year 1 and 2 directly into the existing DC scheme which newer employees had joined over the previous 10 years, following the closure of the DB to new members.

At the time I did some sums to calculate the value of the DB I was receiving and it was equivalent to almost 50% employer contribution and was leaving me around £300k worse off by retiring. Ultimately the business had ploughed in over £100m to cover liabilities over a couple of years and TBH kept it running for far longer than I thought they would.

Now the fund is pretty healthy and between my DB and DC I'm in good shape, albeit it cost me a lot more over the past 5 years in contributions to get there.

Marcon

You've asked for 'independent views' but the only 'view' I'll offer is that I can quite understand why this small group is extremely miffed! Other than that, I'll stick to the facts - cold-hearted as they will sound. USS is unhelpful in terms of being a valid comparator, because it's a vast scheme and you have confirmed this is a very small group of employees.

The issues that many of us remain concerned about are:

1. Whether the consultation process has been meaningful, fair and legally compliant.
2. Whether all realistic alternatives to removing future DB accrual were genuinely explored before reaching this decision.
3. Whether the financial impact on each affected employee has been individually assessed, given that losses vary significantly depending on age, length of service and proximity to retirement.
4. Whether the proposed compensation fairly reflects the potentially substantial and differing long-term pension losses individuals will experience.
5. Whether dismissal and re-engagement is a reasonable and proportionate response when the affected employees are a small, shrinking, ring-fenced legacy group.

1. Without knowing all the details, nobody here can comment with any accuracy. However, given this is a route well trodden by virtually all private sector employers who used to have DB schemes, the legal advice the employer will have received is overwhelmingly likely to be accurate, up to date and comprehensive.
2. There aren't likely to be any realistic alternatives which would meet the employer's commercial objectives.
3. No, nor is there any legal requirement to do so. It would be impossible (and pointless) to try and calculate when there are so many unknown factors.
4. It won't - but the fact you are being offered any sort of compensation is a bonus. There is no requirement for the employer to offer anything other than membership of another pension scheme.
5. It's been a common approach in the private sector for very many years. What other approach is there when a consultation process has been followed and employees don't accept the change?

What sits with many of us is that our employer closed the DB scheme to new entrants over a decade ago. Since then, new employees have joined a DC scheme while the remaining legacy DB members continued in the existing arrangement. Given that two schemes have successfully operated side by side for many years, it’s difficult to understand why removing the remaining legacy DB scheme has now become necessary in the name of “fairness.”

It's been a huge benefit to you to have been allowed to remain in the DB scheme until now - but understandably adds to the dismay when change is proposed, especially as many will be that much closer to retirement. There are plenty of potential good commercial reasons for what is being proposed, including:

• employees in the DC arrangement (and new hires) complaining about the inequality of having a DB scheme which is still up and running, but they can't join it. Employees aren't shy to take pot shots at employers about things like age discrimination - however unlikely such a claim is to succeed in this situation, the employer still has to deal with it correctly
• the 'core' cost of administration of a DB scheme. That will increasingly form a disproportionate part of the costs the employer has to fund to ensure the scheme is properly run
• constant changes to legislation, all of which increase the cost and complexity of running a DB scheme
• the uncertainty of future costs of running a DB scheme, not to mention the management time involved
• It is possible (indeed probable) that the employer will look to buy out the benefits with an insurance company. That would give members 100% certainty that their benefits will be paid, since a buy-out contract is classed as a long term contract of insurance and thus has the benefit of 100% cover under the Financial Services Compensation Scheme, with no upper limit. Closing the scheme to future accrual is usually the first step on the road to doing so.