United States: Changing the Terms of a Pension Scheme

As winding up a pension scheme has become such an expensive option, more and more companies are considering changing the terms of the scheme and the benefits they provide in order to reduce pension scheme liabilities. However, many issues arise on changing the terms of a pension scheme, and this article attempts to summarise some of the most important considerations both under existing legislation and that planned for the future.

The pension scheme documentation will set out the power of amendment. This will state:

• any limitation on the powers of amendment — many schemes specify a number of matters which cannot be amended; and

• who can amend the scheme. Usually, the consent of both the employer and the trustees is required. This may result in extensive negotiation with the trustees to convince them that it is in the best interests of members that the scheme is amended.

The extent to which pension schemes can be validly amended is also limited by section 67 of the Pensions Act 1995. Under this provision, no pension scheme can be amended if the amendment "would or might affect any entitlement, accrued right or pension credit right of any member of the scheme" that has already been acquired, unless:

• an actuary has certified that the amendment would not adversely affect any member; or

• all affected members have consented to the change.

In practice, this has generally meant that changes to most members’ benefits (excluding certain areas such as early retirement benefits or widows’ benefits) must limit reductions to benefits to those to be earned in the future and that many minor amendments to a pension scheme have required an actuarial certificate.

The Pensions Act 2004 will significantly change the provisions of section 67. Under the new rules:

• certain amendments may only be made with the consent of all affected members;

• other amendments will require either consent or an actuarial certificate, which will be given under a lighter test than for the present section 67 actuarial certificate;

• the trustees’ consent will be required even if this is not required under the scheme rules; and

• all members must be informed of the amendments.

In changing pension scheme benefits, it is also necessary to consider the effect that this will have on the terms of employment of the members of the scheme. In particular:

• Are the terms of the pension scheme a term of employment?

• Is the ability of the company to change the pension scheme also a term of employment?

• Are the terms of the pension scheme subject to any productivity or collective agreement with trade unions?

• Will the changes to the terms of the scheme increase employee contributions? If this is done without employees’ written consent, it may be an unauthorised deduction from wages in breach of the Employment Rights Act 1996.

Under new legislation, there will also be a requirement for the employer to consult with employees about changes to pension rights:

• Under the Pensions Act 2004, there are provisions for regulations to be issued requiring consultation on certain matters in relation to the pension scheme.

• Under the Employment Relations Act 2004, regulations that are due to come into force next April will require an employer to consult with employees at their request in relation to any employer decision which is likely to lead to substantial changes in work organisation or contractual relations, which may well include changes to pension provision. The regulations will apply to companies with more than 150 employees, with those smaller companies with at least 50 employees gradually being included by 2008.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.