Benefits surgery: Cutting pension scheme costs

Q We are considering cost-cutting measures in our occupational pension scheme. What legal issues should we be aware of?

A Employers should first examine their employment contracts to check whether they have given staff the right to membership of a specific pension scheme, or whether the entitlement only gives employees the right to be members of whatever scheme is operated. If it is the former, it will be much more difficult for an employer to make changes to the pension scheme because staff could argue they have a contractual right to be provided with pension benefits at a particular level or of a specific kind.

Changing the pension scheme in these circumstances could lead to a claim by employees that their employer has committed a repudiatory breach of their employment contract and that they have been constructively unfairly dismissed.

If the employee has only a limited right to be a member of whatever pension scheme is operated by the employer, organisations still need to be careful before making any changes.

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Employers should obtain express consent from employees to the changes where possible and should be wary of relying on implied consent that has been inferred from a lack of objection from the employee, because they may not appreciate the effect of the changes until they become entitled to their pension fund.

Employers that have more than 50 employees and are proposing to make a major or significant change, such as closing a scheme to new members, must consult with current and prospective pension schemes members.

Failure to comply with consultation duties can lead to the imposition of penalties of up to £50,000 by the Pensions Regulator.†