Closing Your Scheme to Future Accrual
Why are schemes closing?
Many employers have already taken action to control the risks and costs associated with their final salary scheme, such as closing the scheme to new joiners, reducing future benefits, increasing member contributions or securing benefits with a third party. However, a continued rise in costs, mounting legislative and accounting requirements together with a dwindling of the active membership have led to many employers now questioning whether to continue to offer future benefit accrual to any members of their existing defined benefit scheme.
On the surface, closing a scheme to the future accrual of benefits, often referred to as "freezing", 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.
The key elements of the process
Prior to approaching the members or their representatives e.g. unions, works councils etc the employer should first carry out a review of the documents relating to the scheme. The Scheme Trust Deed and Rules will deal with the relative powers of the sponsor and the trustees and the member's employment contract may contain provisions that affect the ability to change benefits.
It is usually sensible to obtain legal advice at this point to confirm the position, not least as the Rules of some schemes can require the trustees to wind up the scheme in this situation. A wind-up will typically crystallise a significant debt on the employer.
Following this review, and having sought actuarial advice on the likely funding implications, the employer should then consider whether it wishes to offer an alternative pension arrangement and the design of that arrangement. Indeed, having carried out these reviews, the employer may decide that freezing is not appropriate and that the scheme should remain in place, although perhaps subject to some redesign.
If the employer still wishes to proceed, the trustees should be consulted and then a proposed plan communicated to the membership. It is a legal requirement that a consultation period of not less than 60 days must apply prior to any changes that are detrimental to the members being made.
Consultation can take many forms but can include written materials, group or individual meetings, helplines as may be agreed to be appropriate or necessary. Special arrangements may need to be considerd for executive or key employees.
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.
How can BBS help?
At BBS we have 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 the parties involved, drafting and delivering communication materials etc.
Involving BBS has, for our clients, led to the timely completion of scheme closures, within agreed budgets and without any surprises. Please contact us if you would like details of our step by step guide to the cessation of accrual.
