Closure cases: How trade unions are changing tack

A number of companies, including The Post Office, BMW and Honeywell, have recently faced anger and disappointment in light of proposals to close their DB schemes.

Longer life expectancy and rising deficits exacerbated by falling bond yields, have contributed towards an increasing number of businesses having to close their final salary schemes to future accrual.

A closure case can be seen as an opportunity to...improve contribution levels for all employees, as opposed arguing for the maintenance of the defined benefit [scheme]

Chantal Thompson, Baker & McKenzie

The possibility of comfortably maintaining final salary schemes is fading fast for most companies. Only 3 per cent of large private sector pension plans remain open to new members, while 97 per cent are closed to new members, consultancy firm Barnett Waddingham reported earlier this year.

As a rising number of businesses draw the curtain on DB, DC adequacy is stepping into the spotlight for unions seeking the best possible outcome for members.

Unite, the UK’s largest union, recently started to protest against the proposed closure of Honeywell’s final salary pension plan. The union has also voiced its concern regarding the “pathetic” alternatives on offer, describing the DC scheme as “woefully inadequate”.

Similarly, in May, warhead manufacturer AWE revealed its intention to replace its DB plan with a DC scheme.

Richard Tabbner, negotiator at union Prospect, says this offer was a poor alternative, noting that it was “actually worse than the defined contribution scheme that staff can currently choose to join”.

Source: Barnett Waddingham

More recently, Unite announced it was balloting AWE members for industrial action, saying company bosses saw DB pensions as “a soft target” to save money for the benefit of shareholders.

Pledging for better DC provision

AWE is not the only company in the nuclear industry to be proposing pension changes, leading to union negotiations.

Nuclear fuel company Urenco has outlined its intention to increase the contributions payable by non-protected members of the final salary scheme. This scheme will be closed to members in April 2017, moving members into the company’s DC scheme.

However, unlike other recently reported pension closure cases, the unions are leading the negotiations with a push for better DC provision.

Rather than pledging to stop the scheme from closing, union officials “reluctantly recognised that the numbers of members involved make it exceptionally difficult to defend the final salary scheme against closure”, according to Prospect.

Improving benefits for all members

The requirements for the DC scheme included making it available for all staff, applying it across all business sites and allowing for a cash payment or a lump sum pension contribution for those coming out of the final salary scheme.

The unions also said the proposals for the scheme should attract a company contribution two-and-a-half times what members pay in, subject to a maximum company contribution of 25 per cent.

In August this year, an update to members stated that unions persuaded the company to improve the defined contribution scheme.

However, the unions are still concerned that Urenco’s offer of compensation is not consistent across its business sites.

“The unions do not believe that this is warranted or fair and are concerned that this may set the benchmark for the company’s approach to employee relations. They have conveyed their anger to the company, but it is standing by this approach,” reads the update.

Janet Brown, partner at law firm Sackers, notes that it is not unusual for unions to be unhappy about scheme closures and to threaten industrial action.

Using closure cases to improve DC

However, she says that “the thing I found interesting is the push they are on for the DC contribution package to be extended to all staff and pushed up.

“Normally the fight is to stop closure and argue for preferable early retirement terms in the final salary scheme to be maintained post closure,” she explains.

Brown says the angle unions have taken “fits with DC being the new home for their members”.

Chantal Thompson, partner at law firm Baker & McKenzie, points out that unions will generally oppose a proposal to close a scheme to accrual. However, “I think that there’s probably a certain amount of realism creeping in”, she says.

Thompson says that during a consultation on closure, unions may be starting to accept that the DB scheme cannot continue.

“Over the past 10 years, a very large number of schemes have closed to new members,” says Thompson. She adds that it is becoming increasingly common for the majority of a company’s employees to be enrolled in a DC scheme rather than DB.

Thompson also suggests that, depending on how many people a union represents in the DC scheme, a closure proposal can be seen “as an opportunity to improve benefits for everyone, or improve contribution levels for all employees, as opposed to arguing for the maintenance of the defined benefit for the category of members that is still entitled to defined benefit”.

The only show in town

This has not always been the case. Alastair Meeks, partner at law firm Pinsent Masons, says: “It’s certainly true to say that, in the past, unions focused more on the DB than the DC provision”.

But he also says that “absolutely pragmatically” unions are recognising the negative aspects of continuing along that path.

“I think it is a constant challenge for unions to make sure they don’t get captured by particular sets of vested interests,” says Meeks.

He notes that there have been times in the past where unions have not been at their best. For example, during the 70s and 80s some fought less hard for part-time workers. “It is something that unions constantly have to watch,” he says.

Meeks says closure cases in which the union fights for good DC provision reflect how they “have cottoned on [to] the need to do their best for all their workers”.

He highlights that, in many companies, DC is rapidly “becoming the only show in town”.

Increasing popularity

Thompson says DC schemes are “potentially more attractive now”, following the introduction of freedom and choice.

She says some people want to take advantage of the flexibilities and although a DB promise is still an extremely good thing to have, it is becoming increasingly uncommon.

“There are plenty of people asking for transfers to defined contribution because they want that much greater flexibility to deal with their pension,” she says.

Moreover, Thompson suggests the growing popularity of DC may go some way towards informing unions’ strategies when it comes to pensions.

Unions are having to think about what members can get from their DC schemes, rather than focusing solely on DB provision, she adds.

Similarly, Brown acknowledges that DC is the future for most people.

“It is interesting to see the DC offering being scrutinised by the workforce who probably enjoyed a very good DB scheme,” she says.