Natasha Browne examines how employers can amend their pension provision without ending up in court
- Employers can make pension changes by giving staff full contractual notice
- Good consultation is paramount to ensuring the process is viewed as fair
- Businesses can face reputational damage for the changes they seek
IBM has faced an enormous challenge in attempting to make changes to its UK defined benefit (DB) schemes. In 2014, the High Court found the multinational had misled staff during a consultation over the closure of the schemes.
The litigation is ongoing as IBM looks to appeal against the members' claim for damages. But the resounding lesson for businesses is that changes are incredibly difficult to make without the risk of lengthy legal battles.
Squire Patton Boggs partner David Whincup says employers can spend a lot of time working with trustees and lawyers to see if they have a contractual right to make pension changes. But the bottom line is that employees will always feel they have a right to the pension they were first offered.
Speaking at the law firm's annual conference on 16 June, Whincup said: "People are going to think they have a right to their current pension provision and anyone forcing in changes has to take that into account.
“To be safe we have to assume we don’t have the contractual right to do anything. Once we’ve got that settled then we are taking the worst option head-on at the beginning.”
Whincup said dismissal and re-engagement was the only safe way to push through changes. This could be done by giving employees full contractual notice.
Taylor Wessing senior employment lawyer Rachel Farr agreed this would enable an employer to change its terms and conditions. But she adds: "An employee would still be able to claim unfair dismissal unless both the reason and the procedure followed were fair."
Consultation is a must. If an employer sacks a worker for rejecting pension changes without having consulted, they will lose in court. Whincup said: "Whether it is collective consultation you may require or individual consultation, there's got to be that stage in your timetable where you do that. It is very important."
DWF pensions partner Tim Green adds: "Implementing the contractual route can be effective, but there are risks.
"In almost all cases where proposed changes reduce benefits or increase contributions, formal pensions consultation is required for at least 60 days.
"Employers should be cooperative and transparent about the effect of the proposed changes and should only take a decision to implement changes once the consultation has concluded and all responses have been considered."
Employers should be sure they have a "sound good business reason" for making the amendment, as laid out by Lord Denning in the case Hollister V National Farmers' Union. They also need to be willing to consult members "with a view to agreement".
Whincup said: "That includes things like not yawning in consultation meetings, or checking your emails, taking phone calls - that sort of thing.
"But ‘with a view to agreement' does not mean you have to agree. It's an important point. You have to be seen to try to agree, and if you can agree that's fine.
"Ultimately the employees' rights are to make representations and understand why they didn't fly. So you just need some reasons why you can't do what they want you do to; it's too expensive or too administratively complex, for example."
The IBM case put the computer giant under a negative spotlight, highlights Irwin Mitchell head of pensions Martin Jenkins. He says: "The one thing that came out of IBM was there was an awful lot of washing dirty linen in public.
"The exchanges, ‘what can we get away with, how will this work, and what will people think of it?' just read very unhappily. I think an employer has to go at it in a very clear and candid way.
"They have to say, ‘here are the facts and here's our plan for trying to resolve it. We need to try to reach some sort of agreed solution'.
"I think if employers went about it that way with the trustees and the workforce and other members, they'd probably have an easier time when it eventually ends up in court."
Whincup said the employer's tone was crucial to being seen to have acted reasonably. He said: "If you've got to change your scheme, you've got to change your scheme. You can't do anything about that.
"But if you do what you can - you explain, you've got evidence of why you did what you did - then on the employment end of changing pension provision, you will be absolutely fine."
Jenkins adds: "I think you can get away with an approach that's in style with the way you've always treated people.
"But if you try and pull fast ones and say ‘well I won't tell the workforce that this is actually a bad deal but I'll put it forward', inevitably you will struggle and it looks bad when all of that information then comes out."
This week's edition of Professional Pensions is out now
MPs failed to place legislation into the Financial Guidance and Claims bill that would have made pension guidance default, which Just Group director Stephen Lowe said left a "bitter taste".
Aegon has called for the government to double the tax exemption on employer-arranged pension advice, up from £500 to £1,000.
Institutional investor confidence in Europe rose by 8.9 points in April with each region showing growing appetite for risk, according to State Street Global Exchange.