Consultation on pension changes one step closer

From 6 April 2006, the government intends to make it compulsory for employers to consult pension scheme members before making major scheme changes. The Department for Work and Pensions (DWP) is consulting on two sets of draft Regulations* introducing this provision. The first set details its requirements concerning who should be consulted, the consultation procedure and the scheme amendments in respect of which consultation should take place. The second set provides employment law protections for nominated pension representatives.

The draft Regulations build on the outline of requirements contained in the Pensions Act 2004. They relate to occupational pension and certain personal pension schemes and apply exclusively to employers, even if the power to make decisions regarding the pension scheme rests with other parties, such as the scheme trustees.

Statutory duty to consult

For some time it has been regarded as a matter of good practice for employers to consult with members and prospective members of their pension schemes before making major changes. In its 2003 green paper on pensions , the DWP announced its intention of introducing a statutory requirement to consult, which it believed would be more effective than non-legislative routes, such as codes of practice.

The draft Regulations set out the consultation criteria that should be satisfied before any scheme changes are implemented. The provisions will not apply to all employers, and box 1 describes the categories of organisations that will be exempt from the requirements. As can be seen, the government intends to phase in the implementation of the provisions over a two-year period to give smaller companies more time to adjust.

Who is consulted?

The draft Regulations require employers to consult with employees if they so choose, or if required by a collective agreement and employees covered by the agreement are affected by a change. Alternatively, or additionally, they can consult one or more of the following:

The DWP is seeking views on whether any other representatives should be listed and on whether there should be a priority order of representatives.

It will be the sole decision of the employer whether to have pension consultation representatives. The draft Regulations provide that the employer may determine how many representatives there should be, their period of office and who they should represent. The consultation representatives would not be expected to act in relation to pensions matters generally.

Box 2 details the long list of changes set out in the draft Regulations about which employers must consult. No consultation is required, however, in respect of amendments brought about by either legislation or determinations by the Pensions Regulator, or those that have no lasting effect upon employees' rights to join the scheme or their benefits.

There is a requirement to consult where a number of decisions are made within a 12-month period if their cumulative effect would have been to require consultation had they all been made at the same time, even though the individual changes do not qualify.

Consultation process

The DWP is suggesting that consultation should take place at least two months before the proposed effective date of any change, although it is seeking views on whether this time limit is appropriate. Employers must:

Employers should "consider" the responses to the consultation and, if the final decision is to be made by other parties, give them written notice of the responses. However, none of the decision-making bodies have to take account of any of the responses as long as they can show they have considered them. Failure to comply with the consultation process does not render any scheme changes invalid, although complaint may be made to the Pensions Regulator, which has the power to impose a fine.

Interaction with existing DTI Regulations

The second set of draft Regulations contain a number of protections for nominated representatives, such as having the right to a reasonable amount of paid time off during working hours to undertake their duties. Failure to allow representatives to carry out their role may lead to a claim for unfair dismissal.

These draft Regulations reflect provisions in the DTI's Information and Consultation Regulations (SI 2004/3426). However, the consultation document does not outline how the DWP Regulations will interact with the DTI Regulations. It simply states that the proposals do not affect any other duties employers may have to consult.

A major difference between the provisions is that the pensions consultation process will be compulsory. The more general information and consultation procedure has to be triggered either by employees requesting an agreement or the employer choosing to start the process. In addition, the parties to an information agreement may choose the topics to be covered (which may include pensions in some circumstances), whereas the changes that trigger the pensions process are to be prescribed by the legislation.

Next moves

The consultation closes on 26 August 2005. Details of the responses will be published in December and, subject to those responses, the government intends the provisions to take effect from 6 April 2006. At the end of 2005, the DWP also intends to publish draft guidelines to explain to employers how to operate the procedures. However, it also asks if more prescriptive guidance should be included in the Regulations.

* "Pensions: the Consultation by Employers Requirement. Consultation on Draft Regulations: Occupational and Personal Pension Schemes (Consultation by Employers) Regulations 2006 and Pensions Act 2004 (Consultation by Employers) (Protection for Nominated Representatives) Regulations 2006. A Consultation Document", www.dwp.gov.uk via "Resource centre" and "Consultation papers".