Eight steps to consider when changing your DC pension
Changing the defined contribution (DC) pension scheme might be something organisations are considering in the context of furlough or simply in the course of your ordinary business. Done well, change exercises can be a great opportunity to educate and engage employees about pension benefits. Helen Rowan identifies eight practical steps that HR teams should consider to make the pension change a success.
Employers may review their pension offering for many reasons, some within their control, others, not. Whatever the background, there are steps that all should consider.
1. Decide exactly what is changing, taking into account any legal constraints
What is changing will depend on each employer's goals and objectives. Common changes include changing pension provider and/or pension contribution rates.
When working out the details, it will be important to factor in any relevant legal constraints, for example, auto-enrolment law may affect the timing of enrolment into any new scheme and the level of contributions offered.
2. Decide and/or identify exactly who will be affected
The changes may affect employees in the current workplace pension scheme and others, such as new joiners and non-members.
Do think about whether each change is intended to apply to (and in the same way to) everyone and how to communicate with different groups e.g. those on secondment or extended leave.
Employers often begin a benefit review intending to treat everyone the same, only later to find that they wish to treat certain groups differently (subject to anti-discrimination law constraints). The earlier that any such exceptions can be identified and addressed, the better.
3. Identify and engage with key stakeholders
Think about who needs to be involved at each stage of the project. This is likely to include key decision makers, the payroll team and any new and/or existing pension provider. Ideally, involve them in shaping the project from the start.
4. Check employment contract terms
An examination of employment contract terms will be essential. This will include written terms (including side letters) as well as any implied terms arising from custom and practice and employees' reasonable expectations.
Employers may be required to carry out an employment law consultation in order to change terms and conditions and employment law advice should be taken where there is any uncertainty.
5. Finalise proposals and decide whether to consult affected individuals
Employers with 50 or more employees (measured over 12 months) will typically need to consult under the pension consultation regulations before deciding to make certain changes affecting their pension scheme. This includes increasing employee or decreasing employer contribution levels.
Closing an existing scheme to new members or future contributions also requires consultation. Technically this is the case even where a new scheme is being rolled out. Should consultation additionally be required under employment law, the two exercises can usually be combined.
6. Consult affected individuals
Consultation, if applicable, may mean delays but can be done in a light touch way. Done well, it allows employers to test a proposal and seek feedback, and to educate the workforce about the financial value of their benefits, encouraging employees to engage with their retirement savings.
To comply with the pension consultation regulations, you must give affected individuals and their representatives prescribed information about the proposed change in writing (see below). The employer must then consult for at least 60 days (either directly with affected individuals or their representatives depending on the circumstances) and consider responses received during that time before deciding whether and how to go ahead.
Consultation can take any form provided that (a) it is designed to cover all affected individuals, and (b) the employer works with those consulted in a spirit of co-operation, taking into account the interests of both sides. There is no requirement under the regulations for the employer to undertake consultation with a view to reaching agreement.
While failure to consult under the regulations will not invalidate any change, it would normally risk a fine from the Pensions Regulator of up to £50,000. The Pensions Regulator will not however take regulatory action in respect of a failure to consult for 60 days in certain furlough-related circumstances (until 30 June 2020).
Meanwhile, failure to carry out an employment law consultation could lead to awards of up to 90 days' pay per affected employee. Making a change to the employment contract, without consulting, could also be a breach of contract, entitling the employee to claim compensation for any financial loss.
7. Make final decisions and communicate to affected individuals
Information issued before any consultation period, must describe the proposed changes and their effects and include any relevant background information and proposed timescales. The style and content must allow those consulted to understand the impact the proposed change would have on the affected individuals.
After deciding on a change, an employer will wish to communicate the relevant details, including timings. If scheme members' existing pension savings will be transferred to a new pension provider, additional information and notice may also be required.
When preparing communications, you may wish to address any gaps in your employees' knowledge and highlight any decisions they need to make (saying what will happen if they do nothing). Consider adding illustrations showing the effect of the changes on pension savings and take-home pay, and reminders about updating death benefit nominations, investment choices and intended retirement ages.
8. Implement changes
Rolling out the change may involve reviewing, negotiating and entering into paperwork with any new pension provider and updating the payroll system.
Planning well and working with key stakeholders from the outset should help to streamline the implementation process and ensure a successful transition for both employers and employees.