FIVE ESSENTIAL steps employers must take before closing a final salary pension scheme to accrual

by Brian Spence   •  
Pirelli is the latest UK employer to close its final salary pension scheme to existing members. I thought it would be helpful to set out FIVE ESSENTIAL steps employers must take before consulting employees on the closure of a final salary pension scheme. 1. Consider Alternatives to Closure Business circumstances may require closure or you may be determined to hop on the bandwagon to limit pensions risk.  Either way, do not get carried away because the question will come from employees, trade unions or the pension scheme trustees themselves – have you considered the alternatives?  If you haven’t you will appear both uncaring and a bit foolish. Spence & Partners have developed relatively simple spreadsheet tools to model any common replacement benefit structure including CARE, money purchase, limiting pensionable salary increases, cash benefit etc. 2. Consider Contractual Position Legal advice must be taken on each and every variation of wording used in contracts of employment to determine the risk of a final salary pension being considered to be contractual.  Contracts of employment can be changed but the risk involved and the procedures that need to be followed are considerably more complex where there is a high risk that the pensions promise is contractual. 3. Understand the power of the trustees It is essential to understand what power the pension scheme trustees can wield in thwarting or delaying an employer proposal.  Closure is the most controversial decision that employers are ever likely to take in connection with a pension scheme and the trustees may have strong personal views or even vested interests. Depending on the structure of the power of amendment trustees may be able to block a closure proposal and, at the very least, are likely to argue for concessions on scheme funding or other matters as a price for their cooperation. 4. Understand your data When considering the impact of the closure of a pension scheme, employees need information on how it effects them as individuals.  We normally recommend the provision of individual benefit projections for each and every pension scheme member. In a number of other posts ("Pensions administration - the devil is in the data" , "Pension scheme data after scheme closure" , "Good record keeping is key to a well run pension scheme") we have stressed that the integrity of the data required for buy-out etc considerably exceeds what is required when a pension scheme is ongoing. To provide individual projections for all pension scheme members is also demanding and the data should be audited at the start of the planning process to identify if any remedial work will be required before member projections can be provided. 5. Take independent actuarial advice Closure of a pension scheme to accrual may bring to the fore fairly stark conflicts of interest between the position of the employer and that of the pension scheme trustees.  Even if it has been possible up to now to muddle along with one firm of advisers this is without doubt one of the foremost examples of circumstances where independent employer directed actuarial advice should be obtained. Closure of a pension scheme is rarely a cause for celebration and the consequences to individual employees can be very unwelcome but by conducting the process properly and professionally the consultation can be successfully completed without too much collateral damage to the hard won relationship between employer and trustees.

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