In an attempt to tackle a £14bn deficit, BT has announced plans to close its defined benefit scheme (BTPS) to 11,000 managers and significantly reduce contributions for 21,000 non-managerial staff. The company is also proposing to switch pension increases from RPI to the less generous inflation measure, CPI, and remove the current national insurance rebate.
The Communication Workers Union (CWU), which represents BT engineers, branded the plans ‘unacceptable’ and urged members to reject the proposals.
An employer that is proposing to close or significantly amend the benefit structure under its pension scheme will need to consider a number of matters:
Employee contractual entitlements
Due diligence should be undertaken on affected employees’ employment contracts to ensure they do not confer a contractual right to defined benefit pensions. If there is any contractual issue, the relevant contracts would need to be varied.
Employers will need to check if they have the power under the scheme rules to make the required changes, or whether the rules need to be amended for this purpose. If an amendment is required, the amendment power in the scheme rules should be checked for any ‘courage’-type clause (a restriction protecting benefits already secured by past contributions), as this severely limits the amendments that can be implemented. Companies faced with this situation would need to consider alternative ways to close a scheme or amend benefits by variation of employees’ contracts by informed consent.
Proposal to trustees
The employer will need to present a business case to the trustees, explaining the reasons for its proposal and seeking their agreement in principle. It is important that the employer has considered alternatives to the proposed action; for example, reducing future accrual rates or increasing employees’ contributions rather than closing a scheme, as the trustees will query what other options have been pursued. Further, the business should ensure that in company board minutes and correspondence with members, trustees and others, it has not made a final decision. Consideration should also be given to whether mitigation should be offered, such as enhanced employer contributions into a defined contribution scheme. Once a proposal is agreed in principle between the parties, a 60-day consultation period will be required.
Employers with 50 or more employees that propose to make certain ‘listed changes’ to their pension scheme, including closure to future accrual, reduction of pension increase and increase in member contributions, must undertake an employee consultation. Affected employees should be provided with specified written information including details of the listed change, its likely effect, the timescale for implementation and relevant background information.
The importance of proper consultation was recently emphasised in IBM v Dalgleish. The Court of Appeal endorsed the High Court’s finding that IBM had breached its statutory and contractual duties by failing to consult in an open and transparent manner, which entitled members to claim damages. As such, employers should ensure that a genuine consultation is undertaken, with the rationale for its proposal clearly communicated to members and their views given due consideration. However, provided this is done, employers will not be prevented from making the changes even if members oppose them.
Documenting the changes
If the employer decides to implement the proposal, an amending deed will need to be prepared to change the rules or, if the contractual route is pursued, revised contracts drafted and agreed.
Given the general trend for final salary scheme closures and capping future benefit accrual, BT’s announcement will come as no surprise to many in light of BTPS’s massive deficit. The company’s consultation runs until mid-January, with a decision expected shortly after, and commentators will watch with interest to see how events unfold over the coming months.
Paula Warnock is a partner, and Lisa Suares a trainee solicitor, at Hill Dickinson