pensions 37


Are you looking to close your DB pension scheme?


The number of defined benefit (DB) pension schemes has declined significantly. Employers have sought to control the risk and cost of providing pension benefits to employees by moving from existing defined benefit (or final salary) structures to defined contribution (DC) schemes, writes Ben Seth, solicitor, Pitmans


The move from DB to DC means that employers closed their pension schemes to the accrual of benefits to stop any further liabilities building up in their existing DB scheme. However any employer that is now wishing to implement a closure of its defined benefit scheme or make amendments to benefits to reduce future liabilities must be cautious that these changes are lawful and do not lead to unwanted and often unexpected consequences, especially in light of recent case law.


In April of this year, the High Court handed down its judgment in IBM UK Holdings Ltd and another v Dalgleish and others. The case concerned the actions taken by IBM regarding its decision to close its defined benefit schemes to future accrual. The judgment examined the employer’s actions in the process of closing the schemes to future accrual and found that IBM had breached its implied duty of good faith and its contractual duty of trust and confidence.


Any employer now looking to close their defined benefit pension scheme should be aware of the ramifications of this judgment and the further considerations that now apply:


1 Consider members’ expectations in light of present and past communications


Any employer wishing to effect benefit changes, will need to carefully consider what reasonable expectations members are likely to have, following receipt of a formal communication informing them of any proposed changes. Even seemingly innocuous wording and everyday language as to the future of the scheme has been interpreted in such a way as to penalise the employer. Great care must be taken not to use wording that may mislead members and to very carefully review any previous communications to assess what messages may have been conveyed to members about their future benefit entitlements at that time.


THE BUSINESS MAGAZINE – THAMES VALLEY – JULY/AUGUST 2014


2 Internal employer correspondence may be scrutinised


Internal correspondence between company management is open to scrutiny and examination by a court in order to gain a broader view of the rationale behind a scheme closure or benefit change. Employers must be acutely aware that any communications at all regarding pension scheme benefit changes could well be reviewed at a later date, should a dispute or concern arise.


3 Give trustees honest reasons for changes


Employers must provide the trustees of the scheme with full and honest answers to questions about the intention behind any proposed closure. Employers should be prepared for trustees to ask more questions and seek greater assurances following recent case law and they should be willing to supply them with these. If you are a trustee, you should view the outcome of this case as an opportunity to now seek greater assurances for members and ask more challenging and probing questions of the scheme sponsor about their intentions.


4 Do not presume the result of a consultation process


Employers should understand the critical importance of not making final or pre- determined decisions on proposed changes to a pension scheme until any formal consultation process has concluded and all responses have been considered. A genuine consultation must be carried out and employers must be prepared to revisit their initial proposals with an open mind in light of feedback received from members.


5 Timing between changes will be reviewed


Changes to benefit structures and pension schemes in general should be viewed as a significant decision. Therefore, any changes must be fully considered and only taken if necessary and schemes should not be restructured and amended too frequently. Where a considered approach is taken, and


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changes are not rushed through in a short timescale, it is more likely that an employer will be acting in accordance with the duty of good faith owed to scheme members.


Conclusions


Whilst this case sends out a number of important messages, it does not mean that all scheme amendments and closures will necessarily be in breach of the employer’s duty of good faith or cause a problem for an employer. It does however emphasise the fact that employers will need to behave very cautiously and precisely when planning or implementing closure to accrual or any changes to benefits which may reduce member benefits. We anticipate that the end to contracting out in defined benefit pension schemes from April 6, 2016 will be a good opportunity for many employers to review their pension arrangements.


For further advice on how to go about effecting a change to an existing pension scheme arrangement, or for any other pensions related advice, contact Ben Seth or another member of the Pitmans pensions team.


Details: Ben Seth


0118-9570259 bseth@pitmans.com www.pitmans.com/pensions @PitmansPensions


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