UK Pensions Briefing | Consultation on Listed Changes – an update for employers and clarification of an exclusion for certain transactions | September 2024

This briefing is an updated version of our briefing first published in December 2017 and sets out some practical pointers for employers who wish to make changes to a pension scheme which may fall within the statutory definition of a "listed change".

It also clarifies whether a statutory consultation is required where pension changes are effectively a side-effect of a transaction.

• What is the relevant law?
• Which employers are affected?
• What are the "listed changes" that require consultation?
• Are there any changes which do not require consultation?
• Who should be consulted?
• How should the consultation be conducted?
• What is the role of the trustees in the process?
• What are the consequences of a failure to consult?
• What happens if the proposals change as a result of the consultation?
• Is consultation required where pension changes are effectively a side-effect of a transaction?
• How to manage the consultation process effectively

What is the relevant law?

There is a statutory duty for employers in multi-employer schemes and employers with occupational pension schemes, or personal pension schemes to which they contribute, to consult active and prospective members before making certain changes to future pension provisions. Prospective members are, broadly, employees eligible to join. There is no requirement to consult deferred or pensioner members.

Two sets of regulations govern the consultation requirements:

• The Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006 (the Consultation Regulations) list the changes that will trigger the duty to consult. The consultation must be conducted in good faith but there are no prescribed details on the manner of the consultation, neither is there a requirement for the employer to obtain members' consent before making any changes. The legal duty is simply for the employer to consider the responses received before deciding whether to go ahead with the proposed changes.
• The Occupational Pension Schemes (Consultation by Employers) (Modification for Multi-employer Schemes) Regulations 2006 (the Multi-employer Regulations) extend the Consultation Regulations to cover multi-employer schemes so that they apply where someone other than the immediate employer or the trustees of the scheme has the power to amend the scheme rules. The Multi-employer Regulations apply to each employer in a multi-employer scheme, rather than to a group of companies as a whole.

Which employers are affected?

Employers, trustees and managers of a scheme, and in the case of multi-employer schemes, any other person who has the power to make a change under the scheme rules (such as the principal employer), cannot make a "listed change" before consultation has been carried out in accordance with the Consultation Regulations. In many instances, a listed change will involve the exercise of the scheme's power of amendment. However, there may be circumstances in which a change in practice under an existing scheme power, which does not involve the exercise of the scheme's amendment power, will be a listed change. If the trustees have the power to make a change, they cannot do so unless they are happy that the employer has undertaken the required consultation.

Employers with 50 or more employees are subject to the consultation requirements. For multi-employer schemes, this could result in an employer with at least 50 employees having a duty to consult, whilst another participant employer in the same scheme with fewer than 50 employees having no such duty, although the changes would affect both sets of employees. These numbers relate to the total number of employees, not just employees who are pension scheme members. In a multi-employer scheme, each employer who meets the threshold has its own obligation to consult.

Some employers are excluded entirely from the consultation requirements. Exempt employers include those that participate in occupational pension scheme with fewer than two members and small occupational pension schemes, including most self-administered schemes (with fewer than 12 members and where all of the members are trustees of the scheme).

What are the "listed changes" that require consultation?

"Listed changes" in respect of occupational pension schemes are:

• Increasing normal retirement age.
• Closing the scheme to new members (or a class of new members).
• Ceasing or changing members' future accrual of benefits under the scheme.
• Removing the liability to make employer contributions to the scheme.
• Introducing or increasing member contributions.
• Changing the rate of revaluation or indexation where this would be, or would be likely to be, less generous to members.¹
• Changing any final salary benefits to money purchase benefits.
• Reducing employer contributions to money purchase schemes.
• Changing the elements of pay that constitute pensionable earnings or changing the proportion, or limiting the amount, of any element of pay that forms part of pensionable earnings.

"Listed changes" in respect of personal pension are:

• Ceasing or reducing employer contributions to the scheme in respect of some or all members.
• Increasing member contributions in respect of some or all members.

Are there any changes which do not require consultation?

There is no requirement to consult on scheme changes if they are necessary to comply with legislation or a determination made by the Pensions Ombudsman. Additionally, the Consultation Regulations state that no account is to be taken for the purposes of the consultation requirements of "any change which has no lasting effect on a person's pension rights to be admitted to a scheme or on the benefits that may be provided under it". We return to this exclusion below.

Who should be consulted?

The employer must consult either as many of the affected members as is reasonably practicable, or their representatives. Where any of the following bodies exist in respect of affected members, the employer must consult with at least one of them:

• A recognised independent trade union.
• Representatives of the affected members under an information and consultation agreement.
• The affected members themselves if the agreement provides for direct consultation.
• Representatives specifically elected for the purposes of pensions consultation on pension changes on behalf of affected members.

If none of the above apply, the employer should consult directly with the affected members.

How should the consultation be conducted?

Employers must provide written notice to affected members or representatives about the proposed changes. The consultation period must last for at least 60 days. The information provided to affected members should include:

• Details of the proposed change.
• The date the proposed change would come into effect.
• The likely effect on the scheme and its members.
• Relevant background information.
• The closing date for receipt of responses to the consultation.

Consultation must be genuine and meaningful and should make clear that the outcome is not pre-determined. Although employers are required to consider any responses, they are not required to obtain employee agreement to the proposed changes. The Consultation Regulations impose a duty "to work in a spirit of co-operation, taking into account the interests of both sides".

What is the role of the trustees in the process?

The trustees cannot agree to make a listed change unless they are satisfied that the consultation has been properly carried out. They may wish to see copies of the consultation documents and to be kept informed of its progress.

What are the consequences of a failure to consult?

A failure to consult does not invalidate any change. However, employers may be at risk of a financial penalty of up to £50,000 (or £5,000 if the employer is an individual) from the Pensions Regulator. The Regulator has the power to waive certain legal requirements but only if it is satisfied that such waiver is necessary to protect the interests of the scheme membership generally.

In IBM UK Holdings Limited and another v Dalgleish and others [2014], the High Court held that the defective consultation process amounted to a breach of the employer's contractual duty of good faith. Although a number of the findings in the High Court's decision were successfully challenged on appeal, this finding was not challenged. The Court of Appeal held that members were entitled to claim damages from the employer in respect of its consultation failures. However, in practice it may be hard for members to establish that the outcome of the consultation would have been different even if the correct process had been followed.

What happens if the proposals change as a result of the consultation?

If the employer changes its initial proposals for change as a result of members' feedback during the consultation process, it may be in the unfortunate position of having to conduct the consultation anew in respect of the new proposal.

However, there are two sets of circumstances where a new consultation is not necessary:

• Where an employer consults on stopping further benefit accrual and instead decides to reduce the accrual rate.
• Where the employer consults on stopping its contributions and instead reduces the contribution rate.

Is consultation required where pension changes are effectively a side-effect of a transaction?

For example, in a transaction where all employees of a group company are to be transferred to another group company (with no changes to pension entitlements under the group's occupational pension scheme and the dormant company being wound up) is this a "listed change"? The Consultation Regulations require a 60-day consultation where the proposal is to "remove the liability to make employer contributions towards the scheme" in respect of affected members. A consultation must be conducted where a "listed change" will "affect" the scheme. However, as noted above, there is an exclusion to the consultation requirements where the change has no lasting effect on the members' rights to be admitted to a scheme or the benefits that may be provided under it.

Does the transfer in our example "affect" the scheme? In this instance, as the scheme in question is a group occupational pension scheme and the obligation to make contributions was taken on by another group company, it is arguable that no consultation is required. This would also be the case where the pension arrangement is a group personal pension scheme or a master trust. The change would, however, need to be covered in any separate employment consultation under the TUPE regulations.

The Regulator also recognises in its guidance that it is not always practical to consult, for example, when restructuring is taking place and there is an immediate threat to either the scheme or employees' jobs if the process is delayed. In such cases it urges employers to provide as much information as possible to those affected even if only on a confidential or restricted basis and to apply the longest practicable timescale before the changes are implemented.

How to manage the consultation process effectively

We conclude by offering some tips for employers in conducting a successful consultation process:

• Plan the process carefully and as far in advance as possible so that any necessary consultation can be built into the time-frame of a commercial transaction.
• Decide who needs to be consulted - the affected members or the representatives?
• Keep your communications clear in the interests of preserving good employer-employee relations.
• Weigh up if strike action could affect your business where trades unions are involved.
• Involve the scheme trustees at an early stage to ensure the process runs smoothly.
• Remember that there may be other circumstances under which the employer may have a duty to consult, such as part of the contractual duty of good faith (as in IBM above) or on the transfer of a business under the TUPE framework.

Footnotes