Employers that want to make major changes to their future pension arrangements must consult fully with affected staff and their representatives.
No change can be made before this consultation has been carried out.
Only employers with over 50 employees need to consult. The Government considers it best practice for smaller companies to consult with staff as well.
Consultation must take place if the employer intends to close an occupational pension scheme to new members, or stop further benefits building up. Consultation is also required when a firm wishes to swap its defined benefit pension scheme for a defined contribution pension scheme.
Companies should also engage with staff when they intend to increase the level of contributions staff are required to pay, or if they intend to change the basis for determining future pension benefits.
Employers do not need to consult if they are changing the provider of their group personal pension or stakeholder pension scheme.
A consultation period should usually last for 60 days, so it is important for an employer to take this into account if it plans to implement the changes in the near future.
Employers must consult with affected active and prospective members of a pension scheme if they plan to make changes. Prospective members are considered to be anyone who is not yet a member of the pension scheme but who could join it with the employer's agreement. Prospective members also include anyone who could join the pension scheme after a waiting period.
It is not always immediately obvious who all the affected employees are, as it is possible that some members of staff could be indirectly affected by any changes.
If there are other employers within the pension scheme then the company that proposes changes must tell the other companies. Those companies must then consult with their affected staff and give any responses to the company proposing the changes.
Representatives of staff must also be consulted on any proposed alterations to the pension scheme. This includes engaging with trade unions and other representatives appointed under the Information and Consultation of Employees regulation requirements.
The employer who proposed the change must consider all responses in writing. This should be documented.
Employers must clearly explain the proposed change to affected employees in writing. This is to enable individuals and their representatives to comment on the company's plan.
The explanation should detail what the change is, how it will affect employees and when the change is due to come into effect. The government expects employers to provide staff with a working example that illustrates how someone might be affected.
Pension trustees should check that all the affected employees have been consulted before agreeing to an amendment in the pension scheme.
The Pensions Regulator can issue a fine of up to £50,000 on employers who do not consult. The changes will still be valid even if a fine is imposed.