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Defined Benefit Pensions - collectively agreed changes to accrued rights?

Defined Benefit Pensions - collectively agreed changes to accrued rights?

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Prospect has just responded to the Department for Work and Pensions’ consultation on Security and Sustainability of Defined Benefit Pension Schemes.

Such schemes remain the preferred means of pension provision for trade union members as they offer guarantees of income in old age. However with guarantees, come uncertainties; and with uncertainties come volatilities when circumstances or expected future circumstances change.

These volatilities have caused many employers in the private sector to abandon these types of pension scheme altogether, but a commendable number are persuaded to stick with them. The volatilities arise due to a number of convoluted factors, most notably linked to life expectancies, ageing membership and low interest rates. 

While we argue that many of these volatilities are overplayed, the truth is that for many pension schemes, the cost of the guarantees has gone up drastically. In some cases (but not as many as some employers’ bodies would have us believe), this cost increase puts exceptional pressure on an employer’s ability to afford a pay rise, their full wage bill; or even causes a company to go insolvent.

None of us are immune to the pressures that can be caused by pension volatilities and pensions remain a highly delicate subject matter with many of the employers we engage with.

This consultation was touted as being the mechanism for offering pension schemes an opportunity to renege on a promise. Any move to reduce promised rights that have been built up is prohibited by law, with reductions possible only if a sponsoring employer goes insolvent (in which pensions are reduced to the PPF amounts) or if a member gives their individual consent.

Prospect has argued that this consent criteria should be altered to provide for collective consent to be possible (excerpt from response copied below). This would mean:

  • An employer seeking to reduce accrued rights would have to convince members that there is a compelling reason for them to do so. Members would be balloted on any proposals – so members still hold the balance of power
  • Accrued rights would be put on an equal footing with pay which can be altered through collective bargaining
  • The collective nature of how these schemes are funded and constituted is replicated in how benefits are protected
  • A scheme with a significant number of employee members may be more likely to accept a change, if it was accepted that it could secure jobs and other terms and conditions
  • Conversely a scheme with mostly pensioners, would probably not have the same considerations and would be less likely to accept a change
  • Trade unions are likely to have a significant role in bargaining on behalf of members, potentially including pensioner members.

I still suspect that, as with now, there would be few instances in which such reductions to accrued rights would actually prevail, but under such a mechanism, members would be able to make an informed decision, safe in the knowledge that any changes would be applied collectively, rather than playing a game of chicken with other members through an individual ballot.  This seems to me to be the essence of trade unionism - gains are best won together and problems are best dealt with together.

Despite the election being called, this consultation has remained live, with DWP officials saying that it will inform discussions with the next Government. It is possible that a Labour Government would choose to ignore the policy area altogether; or that an emboldened returning Conservative Government could decide to implement a preferred position regardless.  Much may ride on manifesto positions

Undoubtedly, many will use the consultation as an excuse to advocate a position whereby reductions in pension rights can be made without member involvement or consent needed. Many in the pensions industry and amongst sponsoring employers want to allow the ability for employers to simply wash their hands off a pension promise.

This is never a position Prospect would agree to, without member consent. However in allowing for collective consent, the possibility of having a pressure release valve which is controlled by members might serve to make these pension schemes more secure and sustainable.

Extract from response

The law currently allows the renegotiation and reduction of accrued rights, where these have been agreed by members on an individual basis. We believe that the principle of member consent should be retained in any instance of a promise being diluted – be it a reduction in accrued benefits, including any change in indexation (temporary or permanent).

However we are of the view that defined benefit pension schemes are collective in nature. Also, given that pensions are defined as deferred pay, and given that pay can be subject of collective bargaining provisions, we can see an argument that collective consent could be sufficient to achieve any legitimate variation in accrued rights. This would ensure that members retain the power to accept or reject any change; and would ensure that a convincing case has to be made.

The constituency for any such ballot would have to include all pension scheme members, and would undoubtedly have to involve trade unions. As such it is likely that an employer who continues to offer such a scheme to their workforce could be more successful in making a compelling case than one who only supports deferred and pensioner members. This would ensure the attractiveness of keeping such schemes open as well as the sustainability of both scheme and employer.

We believe that any moral hazard that would encourage funding to a lower level would be avoided through full disclosure of information to members and their representatives. If parties who would be called upon to authorise any change are not convinced that they have been provided with full information, or on the basis of information provided are not convinced that a case has been made; they would be unlikely to accept any change.

Philip McEvoy

Philip McEvoy


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