Q&A – How worried should workers be about moves to shut down final-salary pension schemes?

Brian Spence

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Q.   Every time I open the paper I see another company pension scheme is closing. I am worried that our may be next. How easy is it for my employer to close the scheme to new or existing members, and what as a members should we be monitoring?

Firms cannot any longer have an open-ended commitment to final salary pensions, especially in the environment where deficits narrow or widen almost on a daily basis.

But closing a final-salary pension scheme is not an easy or uncomplicated option.

As a specialist adviser, I tell employers they have five serious issues to consider before consulting employees on a scheme closure. Firstly they should be ready for employees, trade unions or the pension scheme trustees to ask whether they have considered the alternatives.

They must be able to demonstrate that all options and their financial implications have been considered, and be able to communicate those clearly.

Advisers can “model” any common replacement benefit structure, including career average earnings, money purchase pensions, and the limiting of pensionable salary increases and cash benefit, with the aim of arriving at a “best fit” and financially-sustainable solution.

Employers must take legal advice on wording used in contracts of employment, because a final-salary pension may be considered to be legally contractual. Contract of employment can be changed, but the risks involved and the procedures that need to be followed are considerable more complex where there is a high risk that the pensions promise is contractual.

Pension scheme trustees can wield much power in thwarting or delaying an employer proposal. Closure is the most controversial decision that employers are ever likely to take in connection with a pension scheme. The trustees may be able to block a closure proposal and, at the very least, are likely to argue for concessions on scheme funding or other matters as a price for their cooperation. Employees must be given detailed information on how any proposal affects them as individuals.

We would normally recommend the provision of individual benefit projections for every pension scheme member, incorporating the impact of state benefits.

The quality of all the data required is very demanding, and we would say that rather than muddling along with the same set of advisers an employer should take independent actuarial advice.

Closure of a pensions scheme is rarely a cause for celebration and the consequences for individual employees can be very unwelcome.

However, by conducting the process properly and professionally, the consultation can be successfully completed without too much collateral damage to the hard-won relationship between employer and trustees.

For further information please contact Brian Spence at Spence & Partners (www.spenceandpartners.co.uk) on 0141 331 1004.

Issued on behalf of Spence & Partners by Blueprint Media

This article was featured in The Herald on 16th Jan ‘10.

Date: January 2010

Brian Spence is a founder of actuaries Spence & Partners Limited and a director of independent trustee Dalriada Trustees Limited.  You can follow him at @briandspence or @PensionsEndgame on Twitter or link to him on LinkedIn.  Dalriada provides professional trustee services and Spence & Partners can provide support to employers in appointing an independent trustee.  Brian has written a series of articles on appointing an independent trustee.

Follow @SpencePartners and @DalriadaTrustee on Twitter.

Brian Spence

Post by Brian Spence

Fellow of the Institute and Faculty of Actuaries and Society of Actuaries in Ireland, scheme actuary, professional pension trustee