Tesco consults with unions to reduce costs

Tesco's decision to raise its retirement age and switch its inflationary measure demonstrates the crucial importance of consultation with key stakeholders.

The retailer's proposal of a two-year increase in the full retirement age to 67 is seen as a harbinger for other private sector schemes.

It will also be changing its inflation index from the retail prices index to the consumer prices index, following the government's switch last year for the public sector.

Tesco, like all UK schemes, is facing rising costs from increasing longevity and the fallout from the economic crisis.

The changes to its retirement age and inflationary measure will substantially reduce the cost of future benefits.

Clear and timely discussions with employee representatives are crucial to gain their acceptance.

The Tesco changes would come into effect from June 1 and affect 172,000 of the scheme’s active workers.

Ruth McAllister, head of media at Tesco, said the changes were essential to keep the scheme open.

She said: “People are living much longer, so pensions cost much more to provide. These changes make our defined benefit (DB) scheme sustainable.”

Every little helps

Tesco is one of only a few FTSE 100 companies to offer an open DB scheme, in the form of a career average benefit.

Good practice is to make your communications as clear as possible

Nick Walker, Usdaw

It is running consultations on the changes with the Union of Shop, Distributive and Allied Workers (Usdaw) and Unite.

Primary legislation on how to consult is set out in sections 260 and 261 of the Pensions Act 2004. These were supplemented by further 2006 regulations.

One such law requires consultations to be carried out over a minimum of 60 days. 

Nick Walker, pensions officer at Usdaw, said he had a number of consultations going on at any one time.

He said: "Good practice is to make your communications as clear as possible, make people understand what is happening to the scheme.”

When consulting with unions, employers should give as much notice as possible and respond to requests for information in full for the consultation to be meaningful, he said.

Walker added: “We will ask for a range of background information such as valuation reports, trustee reports, schedules for contributions, statements of investment principles.”  

Keeping unions on side

Companies can help their case when consulting with unions by anticipating such requests and having the information to hand prior to any meetings.

Common problems occur when the dialogue has not been as good as it could have been

Ken Anderson, Xafinity

Some cases will require pre-consultation with the union on the need for changes, and what such changes will look like, before the formal consultation period begins. These should be factored into any timetable.

Ken Anderson, head of defined contribution at Xafinity, said communications were key in avoiding conflict with unions.

He said: “Dialogue and trust is vital – common problems occur when the dialogue has not been as good as it could have been.

“The drawing of lines should be avoided at all costs and keeping regular dialogue will avoid this."

Communications with members could take the form of roadshows, webinars or Q&A sessions.

Anderson said face-to-face communication was unbeatable and staff were more likely to trust a person known to them, perhaps from human resources (HR), rather than a pensions official. 

To keep unions onside, consulting for longer than the required 60 days sends out an encouraging message. 

Helen Baker, partner at Sackers, advised setting up a special working group with pensions representatives and HR staff, which is tasked with overseeing the project. 

The frequency of meetings should also be decided and timetabled with unions at the outset.

The challenge for the schemes is to simplify messages to get the key points across.

Baker advised appointing communication specialists if employers were unsure of how to deal with this challenge.