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Changing existing pension rights – the legal framework

There may be circumstances where trustees of occupational pension schemes feel they need to change existing pension rights. However, once pension rights have been built up under an occupational pension scheme, the law gives them an element of protection. In particular, in addition to any restrictions imposed by their pension scheme rules, the modification of schemes requirements stop most trustees from making adverse changes to members' existing rights unless certain requirements have been met.

The requirements differ depending on whether the proposed change is a protected modification or a detrimental modification.

Protected modifications

A protected modification is any change that would or might:

• convert existing defined benefit rights into money purchase rights or
• reduce an existing pension in payment

If a change is a protected modification, it can't be made unless any member who might be affected gives their written consent.

Detrimental modifications

A detrimental modification is any change, other than a protected modification, that would, or might, adversely affect any member's subsisting rights. Subsisting rights is defined very loosely, but broadly means accrued rights or existing pensions in payment at the date of change.

If a change is a detrimental modification, it can't be made unless the trustees obtain:

• written consent from any affected members or
• an actuarial equivalence statement from the scheme actuary or, if there's no appointed scheme actuary, any suitably qualified actuary or
• a combination of consents and an actuarial statement for different classes of member

An actuarial equivalence statement is written certification by an actuary that in their opinion, based on reasonable assumptions, the change didn't reduce the actuarial value of members' benefits under the scheme at the time it was made. The trustees have to get the statement within a reasonable time of the change being made (normally one month).

Information & process

Before making either a protected or detrimental modification, the scheme trustees have to give any affected members a clear written explanation of:

• the proposed change and its effect on them
• the consent or actuarial statement process applying to them (as appropriate)
• how to make representations about the proposal

and allow them reasonable time to make representations (normally at least one month).

Further information

The Pensions Regulator has published a code of practice on its website giving more information about the modification of schemes requirements and the related processes.

Changing existing pension rights – exemptions

Some potentially adverse changes to existing rights under occupational pension schemes are exempt from the modification of schemes requirements. For example, the requirements don't apply to changes made to comply with certain legal requirements.

The modification of schemes requirements don't apply at all to the following types of occupational pension scheme:

• public service pension schemes
• schemes with only one member or
• schemes that aren't registered pension schemes

Changing future pension rights – the legal framework

Before an employer can change employees’ future pension provision under an occupational or personal pension scheme they may have to consult the employees. These consultation requirements mean that employers normally have to consult their employees before making any prescribed decision about their future pension provision, although there are some exemptions.

The meaning of a 'prescribed decision' depends on the type of scheme:

Occupational pension schemes

• An increase in normal pension age
• Any increase in member contributions
• The closure of the scheme (including simply closure to new entrants)
• To change what elements of pay make up pensionable earnings, or to change the proportion or limit the amount of any element that forms part of pensionable earnings
• Any changes to pension increases or revaluation
• For money purchase schemes: any reduction in employer contributions
• For defined benefit schemes: any reduction in future accrual rates
• For defined benefit schemes: conversion of any benefits to money purchase benefits.

Personal pension schemes

• Any increase in member contributions
• Any reduction in employer contributions

Further information

The DWP has published guidance on its website giving more information about the consultation requirements and the related processes.

Changing future pension rights – exemptions

The consultation requirements for changes to future pension rights don't apply in a number of situations. For example, some types of scheme are exempt, some types of changes are exempt and also some employers with small numbers of employees are exempt.

Employers with a small number of employees

The consultation requirements apply to any employer with at least 50 employees. This test is based on the average number of employees (not pension scheme members) during the 12 months immediately before the change proposal was made.

Exempt schemes

The consultation requirements also don't apply at all to the following types of pension schemes:

• personal pension schemes with no employer contribution
• public service pension schemes
• occupational pension schemes with only one member
• occupational pension schemes that are not registered pension schemes
• occupational  pension schemes with less than 12 members where all members are trustees and either
  
  
  • all trustee decisions are taken unanimously by the member trustees or
  • the scheme has an independent trustee
• occupational pension schemes with less than 12 members where a company acts as trustee and all members are directors of the company and either 
  
  
  • all trustee decisions are taken unanimously by the member directors or
  • the scheme has an independent trustee.

Exempt changes

Even where the pension consultation requirements do apply to an employer, some proposed changes are exempt. For example, there's no need to consult about proposed changes:

• made to comply with legal requirements
• made to comply with a determination by the Pensions Regulator or
• which have no lasting impact on pension scheme access or benefits.

Similarly, there's no need to consult again where a proposed change is watered down as a result of a consultation exercise. This might apply, for example, if a proposal to stop employer contributions is replaced with a proposal to only reduce employer contributions.

Changing future pension rights – the consultation process

The consultation process is about the employer asking for views on the proposed change from those affected by it and giving them proper consideration before taking a final decision. The employer has to enter the consultation exercise with an open mind and be genuinely prepared to give serious consideration to any representations made and make changes to the proposal.

However the employer doesn't have to agree with the views put to it and, unlike the modification of schemes requirements, the proposed change can be made without the consent of affected members.

The consultation process itself is relatively straightforward:

• Before the start of the consultation period, the employer has to give any affected members written details of the proposed change and the likely effect on them. Affected members means any active or prospective members who might be affected by the proposed change.
• The consultation period should be long enough to allow proper consultation. It must last at least 60 days, but can be longer depending on the complexity of the proposal. Those being consulted must be told how long the consultation period will last.
• At the end of the consultation period the employer is free to make a final decision and communicate this to its employees.

The consultation can be held directly with the affected members or via their elected representatives or recognised independent trade union.

Changing pension rights – penalties

There are potentially heavy penalties for trustees or employers who break the law when making pension changes.

Occupational pension scheme trustees can be fined if they don't take all reasonable steps to comply with the modification of schemes requirements for changes to existing pension rights. The Pensions Regulator can also declare the change void.

Employers or scheme trustees can be fined if they don't take all reasonable steps to comply with the consultation requirements for changes to future pension rights. Breach of the consultation requirements in relation to a change doesn't make that change void. However, the Pensions Regulator can order corrective action to be taken.

The maximum fine for breaking either set of rules is:

• £5,000 for individuals
• £50,000 for companies