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If in doubt it is safer to consult employees before suspending pensions contributions

Earlier this month, American Express announced it was to 'temporarily halt' its pension contributions for 18 months, but considering the impact of this decision and the moves by other global companies to reduce or suspend employer's contributions, do employers have an obligation to consult employees over proposed changes to its pension schemes?

Before making any changes to a pension scheme, employers must consider whether the proposed changes are permitted under the rules of the specific scheme. For most private- sector employers there is also the obligation to consult with employees and their elected representatives. If consultation is required, an employer simply cannot make the proposed change, unless the consultation process is completed, although reaching formal agreement on the change is not required.
The relevant regulations are contained in the Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006 (the ‘Regulations') which were implemented under the Pensions Act 2004. The Regulations apply to private-sector employers that sponsor occupational pension schemes or personal pension schemes (including stakeholder pension schemes), where the employer makes contributions to the scheme. The consultation requirements vary depending on whether the pension scheme is a money purchase scheme or not and there are also some exemptions, which may apply, albeit in limited circumstances.

But in most cases, where a company proposes to make changes to its pension scheme, which are listed in the Regulations, it will have an obligation to consult affected employees for a period of at least 60 days. There is limited scope for the Pensions Regulator to waive or relax the consultation requirements, but this is only in exceptional circumstances, such as insolvency.

The listed changes are set out in Regulations 8 and 9, for occupational pension schemes and personal pension schemes respectively. In summary, an employer will be obliged to consult employees over changes to an occupational pension scheme (for example), if any of the following are proposed:

  • An increase in the normal pension age in the scheme rules
  • Closure of a scheme to new members
  • Prevention of further benefit accrual by existing members
  • Prevention of an employer's liability to make further contributions to a scheme
  • Requirement for members to make contributions where these were not previously required
  • An increase in the level of member contributions

A temporary suspension of employers' contributions to a pension scheme is not included in the list, but is still likely to be a change that gives rise to the obligation to consult under the Regulations. The Pensions Regulator may consider the change to be equivalent to ‘stopping the employer's liability to make further contributions to a scheme', although it is not entirely clear. There is no reference to consultation for a permanent or temporary cessation of payments in the Regulations and very limited guidance from case law, as the consultation requirements are relatively recent (from 2006 onwards, depending on the number of employees). In the meantime, the Department for Work and Pensions (DWP) has issued guidance on the Regulations, dated April 2009, which contains helpful information on the consultation requirements and the DWP's views.

The guidance states: ‘DWP considers that, providing the employer's contribution rate does not change nor the member's contribution rate increases, changing the group personal pension provider is not a listed change and consultation by the employer is not required.'

Albeit in the context of a change of provider, this guidance implies that even a temporary change in the employer's contribution rate (such as a reduction to zero for a certain period), will be a 'listed change' and lead to consultation requirements.

That consultation is required before suspending employer contributions to a pension scheme is certainly the safest interpretation of the Regulations and the most sensible view, given the potential impact on employees.

News reports last week commented that American Express made its recent decision to suspend employer's contributions to its occupational pension scheme after consultation with employees and their representatives. It is not possible to comment on the level of support among staff, as there is no requirement to agree to the change, only engage in meaningful consultation, but this is effectively a pay cut that will affect around 6,000 UK employees, for up to 18 months.

American Express had already made similar changes to its Retirement Savings Plan for US workers in March and for many US companies this was not considered an unusual measure in the economic downturn, particularly as US employees are often employed ‘at will' (with no contract of employment). Although there has been criticism of its decision to use pension contributions as a cost-saving measure, it is hoped that other UK employers will be less inclined to take this step, given the consultation requirements and protection afforded to employees under employment contracts.

Historically, employers have been reluctant to interfere with pension plans and making these changes, even for a short period, has been viewed as a last resort. But times change, and with a decline in the value of existing pension funds and the fear of redundancies, employees (particularly younger employees) might find a suspension of pension contributions more palatable than a reduction in wages, at least in the short-term. American Express and other companies considering this option could be taking advantage of an opportunity to make savings to pension payments now, before the law changes in 2012, when 3% employers' contributions will become mandatory.

For now, any employer considering such steps needs to carefully consider its position and consultation requirements under the Regulations and scheme rules. If changes are to be made to a pension scheme, the impact on employees' terms and conditions of employment must also be borne in mind, so that appropriate contractual changes can be agreed and documented.

Andrea Ward is an associate at Hogan and Hartson