Analysis: Defined benefit scheme closures present significant challenges to all parties involved, but how can sponsors ensure they engage their workforce in meaningful consultation?
Although the number of DB scheme closures tailed off in 2014 according to the Pension Protection Fund and the Pensions Regulator’s 2015 Purple Book, the end of contracting-out in April is likely to be the final nail in the coffin for surviving UK arrangements.
For many DB members, the loss of ongoing accrual cannot be matched in alternative defined contribution arrangements, demanding careful change management from sponsors and trustees in the event of scheme transition.
DB is no longer a benefit executives need to honour, it’s a problem they need to solve
Richard Farr, Lincoln Pensions
Richard Farr, managing director at covenant specialist Lincoln Pensions, said successive reductions in the annual and lifetime allowances has all but removed executives from pension arrangements – increasingly viewed solely as a legacy burden to company balance sheets.
“It becomes much more clinical; it’s no longer a benefit they need to honour, it’s a problem they need to solve,” he said.
Farr said transitions into DC arrangements are, in principle, “bad news” for members. “You can never get an equivalent to DB in DC,” he said.
Seeking equivalence
Equivalence has been a key bone of contention for journalists at the Financial Times, which publishes Pensions Expert, during a seven-month dispute over new pension arrangements.
In July, former owner Pearson confirmed the sale of the FT group to Japanese media company Nikkei.
At the completion of the sale in November, the FT stopped participating in Pearson's DB and DC pension arrangements, and all members were transferred into a new contract-based DC arrangement with provider Zurich.
United Utilities pushes for closure
GMB union members at north-west water company United Utilities have said they will walk out on Friday for a day-long strike over the company’s proposals to close its DB scheme, announced in October.
Eddie Parker, GMB regional officer said: “GMB consider that to enter into talks on the basis of the company’s offer would mean we become embroiled in discussions which will include closure of the scheme.”
A spokesperson from United Utilities said the company was disappointed in GMB's decision to ask its members to strike, adding: “We’ve been consulting with four unions on a proposal to close the DB pension scheme affecting some of our employees. That proposal has now been taken off the table, at the request of the unions, until we know the extent of costs to continue to keep it going, which will be in May.”
The new DC scheme offers an improved contribution structure to those previously provided under Pearson ownership, but the formal consultation over future arrangements for former DB members brought the company to the brink of industrial action earlier this month.
On February 3, strike action by NUJ members at the FT was called off after management offered an improved proposal at conciliation service ACAS; NUJ members voted recently to accept the renegotiated pension terms, bringing an end to the formal consultation.
Under the revised proposal:
the anticipated impact on former DB members has been capped at a maximum 15 per cent reduction of projected future pensions, improved from a previous offer of 20 per cent;
a sum of between 40 per cent and 55 per cent of salary will be provided as a pension contribution over four or five years to members most affected by the transition;
additional contributions will be made in recognition of length of service.
Steve Bird, father of the FT NUJ chapel, said nearly nine in 10 NUJ members voted to accept the new offer.
“United and determined opposition by journalists and staff across the FT group has won a fairer settlement for DB, DC and auto-enrolment pension scheme members,” he said.
A spokesperson from the FT said: “We can confirm that FT NUJ members voted to accept the revised offer for the transition of pension arrangements following Pearson's sale of the FT.”
Meeting expectations
Ruth Bamforth, associate at law firm Walker Morris, said the negotiated outcome between FT management and the union demonstrates that the consultation was meaningful.
“Obviously it’s been a very painful experience but the alternative would offend the consultation process,” she said.
Bamforth said employers have a duty of trust and confidence to employees, and all communication must be open and honest.
“The other side of meaningful consultation is clear communication; don’t set up expectations you’re not going to meet,” she said.
Karen Partridge, head of client services at communications specialist AHC, said communications must provide employees with clarity on the implications of change, preferably on an individual basis.
“It’s perfectly possible to give [personalised illustrations] to all members,” she said.
