01 June 2017
In April workers at BMW’s UK plants started a wave of one day strikes, halting the output of the iconic Mini. This is the first ever walkout by staff at these sites and the cause was BMW’s plan to close a defined-benefit pension scheme and replace it with a contribution-based scheme, a move the Unite union believe will cost workers up to £160,000 in lost income.
Now seems like a good time to highlight some of the issues employers may face when seeking to change pension schemes...
Defined benefit schemes - what are they and why might they be problematic for employers?
BMW are not alone in seeking to change the type of pension they offer their staff.
“Defined benefit” schemes guarantee from the outset the amount the employee will receive as an annual income when they retire (typically their final salary), meaning that it is the employer that takes the risk of ensuring the money is available to cover this. In contrast in a “defined contribution” scheme employees pay a set contribution into a scheme which is then usually invested. The pension they receive on retirement is whatever their pension is worth at that time and is not guaranteed by their employer.
Investing to achieve a final salary scheme has proven increasingly difficult for employers with low interest rates, volatile stock markets and rising inflation, while increased life expectancy means the employer is paying out for longer. Figures released in September last year stated that the combined deficit of the UK’s defined benefit pension funds is £710bn. This has seen numerous businesses looking to amend their schemes.
Obligation to consult on pension reform
If a company has more than 50 employees and it wishes to make a significant change to its pension scheme, such as changing the benefits received, then it must comply with the requirements of the statutory Pensions Consultation Regulations. Enforcement of these regulations sits with the Pensions Regulator who can impose a civil penalty of up £50,000 and order improvement if the right procedure is not followed. Further, case law has shown that a failure to consult properly can allow employees to make a claim against the employer of breaching the contractual obligation of mutual trust and confidence which could potentially be costly for employers.
Breach of contract
Employers are obliged to provide employees with details of their terms and conditions relating to pensions at the outset of their employment. If employees have contractual rights to certain pensions then changing these, without consent, could give rise to breach of contract claims.
In most cases, employers will include a term in the employment contract that the individual is entitled to participate in a scheme in accordance with the scheme rules but usually give no guarantees on matters such as the level of contributions and reserve the right to change or even remove the scheme.
Understandably employees may be aggrieved by a reduction in their benefits such as the change to a less lucrative pension, especially if they originally chose a role with lower pay because of the attractive pension on offer. This has led to strong support for industrial action. Not only was there the recent strike at BMW, employees at Royal Mail are also threatening strike action as a result to a change in their pension plan.
Although exemptions exist allowing discrimination on grounds of age in terms of pensions, it is unsurprising that amending pensions can lead to discrimination claims.
There have been cases, recently, relating to changes to government schemes. In these cases, the government looked to change the pension scheme certain employees were under however they put in place transitional provisions so as to keep those close to retirement on the old scheme or receive tapered relief i.e. those employees over a certain age would be allowed to stay on the old scheme.
Two claims have reached the Employment Tribunal on this, with claimants’ claiming that these transitional provisions directly discriminate on grounds of age (and also indirectly on grounds of sex and race as female and ethnic minority staff are likely to have joined later).
The government admitted that the provisions could be discriminatory (as they no doubt do favour older employees) but have tried to justify them as avoiding a “cliff edge” for those nearer retirement with no time to plan for the reduction.
The Tribunals, in these cases, have unhelpfully reached conflicting decisions. In a claim by the Fire Brigade Union, the Tribunal accepted the government’s justification and found that there had been no discrimination. However, in the separate claim brought by a group of Judges (with similar facts) the Tribunal did not accept the government’s justification and found that discrimination had occurred.
Both cases have been appealed and it is hoped they will be heard together to provide some clarity on the situation.
While auto enrolment may have expanded pension coverage, the financial pressures to reform the more generous pension schemes appears clear. What is less obvious is a way of taking these difficult steps without encountering the range of employment problems discussed above.