1. Changing Scheme Benefits Hilary Salt June 2006

2. 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

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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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 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.

12. 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

13. 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

14. 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

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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. Questions and Discussion