Changing Scheme Benefits Hilary Salt June 2006

Background Many scheme trustees and employers considering making scheme changes Often scheme changes preferable to the withdrawal of benefits entirely “Changes” is interpreted broadly as including: Benefit changes Rises in member contributions Closure to new entrants

Legal Framework for Making Changes Future Service Changes Requirement for consultation Past Service Changes Member consent Actuarial Equivalence

Future Service Changes Covered Changes to benefits including: Raising the Normal Pension Age Reducing accrual Changes to contributions including: Increasing member contributions Reducing employer contributions to DC arrangements “Closing” the scheme

Future Service Changes Not Covered “Members” were notified before April 2006 Change is required by law Change is less severe than a change which has already been consulted on Change is subject to Section 67 requirements

Phasing Arrangements From 6 April 2006: employers with more than 150 employees From 6 April 2007: employers with more than 100 employees From 6 April 2008: employers with more than 50 employees Note – employees not scheme members Guidance encourages all employers to consult

Who Consults Whom? Employer (not trustees) must consult Multi employer schemes – care needed Must consult: Active scheme members Prospective scheme members Eligible to join under terms of contract or scheme rules Including if in waiting period Including cases where employer consent or invitation is needed Can consult All individually Through existing collective organisation Through representatives appointed for this purpose

The Spirit of the Consultation Must cover all affected members Both sides must “work in a spirit of co-operation, taking into account the interests of both sides” Employer must: Give full information Allow at least 60 days for consultation Inform “members” of how and when they must respond, and Consider any comments before deciding whether to make the proposed changes

Remedies If requirements not met, member can complain to Regulator Sanction – civil penalty up to £50,000 for companies, £5,000 for individuals But scheme amendments are still valid Regulator can waive requirements if in interests of generality of members

Past Service Benefits Some weakening of previous requirement that any change to past service benefits requires individual consent Subsisting rights – accrued benefits Increases in subsisting rights are allowed Trustees (not employer) control

Exemptions Finance Act Civil Partnership Act Allow tax to be deducted New rules for Authorised payments Transitional provisions (but beyond 2011) Civil Partnership Act For the above changes, legislation gives non public sector schemes the power to amend rules by resolution. Before we look at the new S67 requirements, legislation helpfully includes a number of exemptions. These include amending the scheme rules to incorporate changes required as a result of the Finance Act – such as allowing administrator to deduct tax, amending rules to ensure payments under scheme rules are not unauthorised payment – such as introducing age of 60 limit to trivial commutation. Also incorporating any of the modifications covered by the Modifications of existing rules regulations (transitional protection) are exempt, but without limiting the change to April 2011. But be careful, introducing a scheme earnings cap that didn’t increase in line with RPI and Also amending rules to allow for Civil partners does not require S67 requirements to be met. Legislation gives trustees the power to modify the scheme rules by resolution.

Two Types of Regulated Modification Protected Modification Covert non money purchase benefits into money purchase benefits Result in a reduction in the current rate of pension in payment Only possible if consent requirements met Detrimental Modification Would or might adversely affect a subsisting right Possible if consent requirements or actuarial equivalence requirement met And trustees approve the modification

Initial Considerations Do Trust Deed and Rules allow? Trustees must consent – even if scheme rules do not require this Should consent route or actuarial equivalence route be followed? No undue influence or coercion can be exercised to obtain consent If members, trustees or advisers feel there is a breach of the requirements or undue influence, they should report to Regulator

Consent Requirements Trustees write to all affected members Details of modification Individual illustration of impact Member may make representations within one month of notice and trustees must consider these But change is only made for individuals who do consent Member provides written consent Modification takes effect within 6 months of providing consent Member does not respond or refuses consent Modification is not made

Actuarial Equivalence: 4 Steps Actuarial value requirement Actuarial statement of equivalence Information requirement Trustee Decision

Cash Equivalent Transfer Value after the change Actuarial value Before the modification, trustees need to consider whether actuarial value is maintained. Actuarial value is maintained if: Cash Equivalent Transfer Value before the change is less than or equal to Cash Equivalent Transfer Value after the change Note that this does not necessarily mean benefits will be the same or better in all circumstances This is a purely numbers check

Actuarial Statement Provided by scheme actuary Before giving it, the actuary must advise the trustees on: The actuarial value check Other issues the trustees should consider, such as: Changes that may be material for some members Adverse modification to a benefit/option not included in subsisting rights Adverse modification not reflected in CETV Funding or solvency issues, including change in coverage on winding up

Information requirement Trustees write to all affected members Details of modification Individual impact on the member Notify that the actuarial equivalence route is being taken Member must be informed of how they can make representations Trustees must make reasonable steps to contact members, but if lost contact, this will not prevent modification from taking place

Trustee Decision Trustees must allow reasonable time for representation (1 month?) Trustees must consider the representations Trustees decide whether or not to make the changes Members informed of Trustee decision If Trustees decide changes should be made, they are made for all members

Past and Future Changes Employer must consult on future service changes Trustees must inform and run consent or actuarial equivalence procedures Members need to respond to both Probably only sensible to run as a joint exercise

Union Role Employer will consult union on future service changes Trustees’ relationship is with individual members – no requirement for trustees to consult collectively But no reason why union cannot make representations to Trustees MNTs will play role within trustee body

Questions and Discussion