Fuat Sami: Employers must be mindful of employees’ expectations during pension changes

A change is as good as a rest’ goes the old saying. Well, not if you are a pension manager or an HR director. Changing pension benefits invariably means hard work and tireless planning.

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Legally, there are broadly two options for achieving change. The conventional route is to amend to the pension scheme’s trust deed and rules. This typically requires the consent of the trustees, which is not always straightforward to obtain.

As a minimum, trustees will want to understand the business case for change. But some trustees will want something in return, such as increased security for their members.

The alternative to ‘rule amendment’ is to agree variations to each member’s terms of employment. Case law has confirmed that this is enough to bind the trustees. But employers should nevertheless plan for a rocky road of negotiation, especially if the workforce is unionised, and have a plan for managing refuseniks.

Irrespective of the legal mechanism chosen, any proposal to reduce pension benefits will trigger a statutory obligation on the employer to consult with affected members for at least 60 days. The first step is providing information, describing the changes, their effect on members, the rationale and the time scales.

The second stage is to consult with staff or their representatives, for example elected union representatives. Consultations require more than simply giving a notice of a proposal; adequate time must be built into the process to obtain feedback and to consider and take account of that feedback. 

Aside from the statutory requirements, in every employment contract there is an implied term of trust and confidence. This is called the implied duty of good faith and was explored in last year’s High Court IBM case.

While an employer is perfectly entitled to consider an act in its own financial interest, it cannot do so following the decision in IBM without balancing this against members’ reasonable expectations.

The employer needs to ask whether it has created positive expectations, through promises made in past communications, as to what will or will not happen to future pension benefits. Any such reasonable expectations need to be taken account of before making a proposal. 

After all that planning, preparation and negotiation, the warm glow of satisfaction that accompanies successful change may not be enough, it is likely that what you will also need is a rest.

Fuat Sami is a partner at pensions law firm Sackers.