The ongoing global financial crisis has resulted in a difficult environment for pension schemes, particularly defined benefit pension schemes. Indeed, in its annual report for 2009, the Pensions Board noted that despite good investment returns in 2009, an estimated 75% of defined benefit schemes remained in deficit. With difficult economic conditions continuing into 2010, scheme sponsors are increasingly looking for ways to deal with large pension deficits without having to wind up the defined benefit schemes they operate or substantially increasing their own level of contributions.
A number of options are available for employers seeking to restructure their scheme. Perhaps the most popular is closing the defined benefit scheme to new entrants and providing benefits on a defined contribution basis to new employees. Other popular options include increasing active member contributions, ceasing future accrual of benefits or freezing or capping pensionable salaries or, depending on the circumstances, making an application to the Pensions Board to reduce benefits under Section 50 of the Pensions Act.
Any restructuring process should begin with a review of the governing documentation of the scheme to establish what, exactly, is permissible under the scheme’s Trust Deed and Rules. Many restructuring proposals will involve a scheme amendment and, as the consent of trustees is often required to amend the scheme, this can often involve difficult and protracted negotiations.
Where agreement regarding necessary amendments cannot be reached with the scheme trustees, consideration can be given to whether the necessary changes can be implemented without amending the scheme, for example, by the employer entering into a contractual agreement with employees outside of the scheme.
It is also important to take the employees’ existing contractual entitlements into account before commencing a restructuring so as to identify any possible entitlements to be provided with a certain level of benefits. Where such entitlements exist then, strictly speaking, these entitlements can only be varied with the employees’ agreement. Any employer who proceeds with a restructuring without giving due consideration to their employees’ existing contractual entitlements runs the risk of being exposed to claims from a number of different sources as well as possible complaints to the Pensions Ombudsman.
The restructuring of a pension scheme can be a complex process in which a large number of factors must be taken into consideration. Employers and/or trustees who are considering a restructuring should seek appropriate professional advice at an early stage so as to avoid any potentially costly delays which may occur further down the line.