Diageo’s Care scheme proposal highlights struggle over DB provision
Two unions are balloting members over industrial action in a pensions dispute with Diageo, as the UK-based multinational proposes replacing its final salary scheme with a career average arrangement.
A number of defined benefit scheme closures have grabbed the headlines over the past few weeks, from Honeywell and Gatwick Airport to the Atomics Weapons Establishment, with employers mostly planning to move existing DB members to a defined contribution structure.
From the point of view of the trustees, what they concern themselves with is only really making sure the historic benefits are protected
Diageo, one of the world’s largest spirits producers, is proposing to convert its UK final salary scheme to one based on career average revalued earnings, and to close its cash balance scheme – which offers a lump sum at retirement – to new members, according to trade union Unite, although no decision has been taken as yet.
A spokesperson for Diageo said: “Nothing has been decided yet on the way forward and any change to the DPS would be subject to consultation.”
No move to cash balance scheme
Initially it was proposed to close the £6bn Diageo Pension Scheme to accrual and move the circa 1,800 active members to the cash balance scheme, the Diageo Lifestyle Plan, according to Unite, a plan that was rejected by union members.
Unite and the GMB union instead requested that the employer keep the final salary pension scheme open and change indexation in the cash balance scheme from consumer price index to retail price index.
Following negotiations at the Advisory, Conciliation and Arbitration Service, the company offered to keep the DPS open in career average form, with changes to accrual, retirement age and indexation, while closing the DLP to new members, said Unite.
Care scheme offer rejected
A spokesperson for Diageo said discussions at Acas “resulted in an alternative and improved proposal”, adding: “The unions have subsequently said that their members are not supportive of the alternative proposal… despite the unions themselves confirming that this second proposal was the best possible negotiated outcome and a fundamentally improved proposal”.
Unite regional officer Pat McIlvogue said the unions made a counterproposal that would have reduced the company’s combined cumulative pension cost to circa 25 per cent of salary across the DPS and DLP, a level he said was “reasonable [and] sustainable” given that the drinks manufacturer recently reported a £2.8bn operating profit.
Potential strike action
However, no agreement was reached, and the unions are now balloting members until November 21 on industrial action.
The spokesperson from Diageo said the unions’ decision “is clearly disappointing and, the company feels, premature as we have not yet moved into consultation on the alternative proposal and discussions continue”.
Management at Diageo “remain committed to finding a sustainable solution on pensions that manages the growing risk and cost for the company with the long-term needs of employees in a competitive pension”, the spokesperson added.
Replacing a volatile liability
Carolyn Saunders, who heads up the pensions and long-term savings team at law firm Pinsent Masons, said it is not unusual for employers to offer career average schemes.
In a Care scheme, “a chunk of benefit builds up in the year in which you earn it and then that just gets revalued”, giving employers a better grip on cost than is the case with a final salary scheme.
Saunders said it is not necessarily the funding level of a final salary scheme that determines whether the employer decides to close it, but the desire to replace a volatile liability with a more controllable one, as well as create consistency in benefits across the workforce. The Diageo scheme was 92 per cent funded on a technical provisions basis in March this year.
James Hutton Institute mulls DB closure
The James Hutton Institute is gearing up to begin negotiations with unions, as it proposes closing its career average scheme in favour of a defined contribution arrangement.
Closure cases: How trade unions are changing tack
It is not uncommon to hear of trade unions stepping in to protect defined benefit provision for members, as final salary schemes continue to close. But with a greater focus on defined contribution adequacy, union approaches to closure cases are evolving.
Employers free to change unless terms are unusual
Saunders pointed out that in most cases, employers can decide freely whether to change benefits where there are no unusual terms of the scheme or employment contracts.
“As a general rule employers are free to change the benefit provision going forward, and certainly from the point of view of the trustees, what they concern themselves with is only really making sure the historic benefits are protected,” Saunders said.
Where there is union involvement, collective agreements “may well” include particulars about pensions, she added.
“But more often than not… the trade union is not in a position legally to stop the closure in terms of the actual legal rights they have and so it becomes a negotiating point.”