Closing your defined benefit scheme to future accrual
On the surface, closing a defined benefit (DB) pension scheme to the future accrual of benefits can seem a simple decision. However, there are a number of potential pitfalls that, if not avoided, could lead to unnecessary costs and employee dissatisfaction.
BBS has a tried and tested approach to the closing of final salary pension schemes. Our consultants and actuaries are experienced in providing all the support required, including managing the process and producing communication materials.
The key elements of the process
Prior to approaching members or their representatives (e.g. unions, works councils etc), the employer must first review their scheme documentation. The relative powers of the sponsor and trustees will be covered in the Trust Deed and Rules, and member employment contracts may contain provisions that affect the ability to change benefits.
It is usually sensible to obtain legal advice at this point, not least as some scheme rules require the trustees to wind-up the scheme in this situation (typically crystallising a significant debt on the employer).
Following this review, and having sought actuarial advice on the likely funding implications, the employer should consider what alternative pension arrangement they will offer. Indeed, the employer may decide that freezing is not appropriate and that the scheme should remain in place, although perhaps subject to some redesign.
Once it has been decided that the scheme closure will definitely go ahead, the trustees should be consulted - and then a proposed closure plan communicated to members. It is a legal requirement that a consultation period of not less than 60 days must apply prior to any changes being made that are detrimental to the members.
With consultation completed, all that remains is to implement the agreed proposals. This will often require further communications with the members and changes to payroll and internal systems.
For our clients, involving BBS has led to the timely completion of scheme closures, within agreed budgets and without any surprises. For more information on how we could help you close your defined benefit scheme to future accrual please click here to contact us.