The continuing economic crisis sees those with responsibility for pension schemes faced with a number of complex issues. There are a number of core issues which we are seeing consistently arise. These include the following:
- Check the Power of Amendment
- Check Employment Contracts
- Check the Effect of the Change
- Conflict, Confidentiality and Consultation
- Obtain Advice
Check the Power of Amendment
Many of the proposals being considered by those managing pension schemes involve a scheme amendment. This will raise questions in relation to the extent of the power to amend the scheme and to what extent that power is restricted. The power of amendment may be restricted by express provisions under the scheme’s governing documentation or implied restrictions and perhaps other legal restrictions.
Amendments will usually require the consent of the corporate sponsor (the principal employer) and the trustees. This raises complex issues of the scope of the duty of good faith owed to employees by employers and the duties owed by the trustees to the beneficiaries under the scheme. Employers will need to be able to show good reasons for what is proposed and the trustees will need to act in the best interests of the beneficiaries as a whole.
In addition, it may be possible to bring about certain changes without amending the scheme, for example, by employers entering into a contractual agreement with employees outside the pension scheme. This will require informed consent and a proper contractual arrangement.
Check Employment Contracts
Employees’ terms and conditions may impact on the corporate sponsor’s ability to make any changes as may prior custom and practice. Employees can have express or implied contractual rights in relation to pensions.
Any change to a pension scheme will also need to be considered in light of the industrial relations difficulties it can raise.
Check the Effect of the Change
The particular changes proposed, whether it be freezing or reducing pensionable salary, freezing the scheme, increasing or introducing member contributions, implementing a hybrid scheme, reducing accrual rates, raising the retirement age or reducing accrued benefits will raise issues particular to the changes proposed. The issue of preserved benefits under the Pensions Act and whether the full effect of the change can be realised for statutory minimum funding standard purposes will also need to be considered.
Introducing or increasing employee contributions to a scheme will raise issues under the Payment of Wages Act.
Conflict, Confidentiality and Consultation
Those involved in the decision making process, whether for the trustees or the corporate sponsor, may face difficult issues arising out of conflicts of interest, duty or confidentiality. Such conflicts, if not properly managed, could jeopardise what is proposed.
A consultation process with employees may be needed in order to get the proposal over the line and to show that the employer has complied with its duties towards employees. In any event, there must be a consultation process where a Section 50 modification order under the Pensions Act is sought or where the restructuring involves a bulk transfer between schemes.
The continuing economic difficulties have increased the problems faced by those managing pension schemes. With the necessary depth of knowledge and expertise to assist all stakeholders in this complex area we provide advice and assistance for corporate sponsors, pension scheme trustees, pension scheme managers and administrators considering how to manage their pension scheme where a wide understanding of all the issues is key.