Deal with an employer event that causes concern to members

Overview

Members of defined benefit pension schemes may be concerned when major events happen at the employer (or look like they are going to happen) in case there is an impact on their benefits.

Major events include when the employer supporting the scheme is in financial distress or is restructuring as part of an insolvency. They may also include events where the employer is not necessarily in financial difficulty but which could nevertheless have an impact on the scheme and raise member concerns, such as:

• reorganisations when the employer is solvent
• corporate transactions
• exercises to redesign employee benefits

Employer events can lead to members asking to transfer their benefits, which may not be in their best interests, and can increase their risk to scams.

As a trustee, you can manage member uncertainty around certain events by communicating effectively with scheme members.

In respect of each major event, we expect you to explain to members the impact on their pension benefits (if any), the employer’s ability to support the scheme and what action you’re taking to manage the situation.

Additionally, to address the possibility that deferred members may seek to request a transfer of their benefits from the scheme as a result of the event, we would expect trustees to include in communications to such members an explanation of the risks associated with taking a cash equivalent transfer value (CETV), and the requirement to take independent financial advice in most cases.

If possible (and if it’s appropriate) you should communicate with members before or at the start of the event in question so any member concerns can be addressed in a timely manner. You will need to consider factors such as the likelihood of the event occurring and the level of commercial sensitivity. If the employer is going through insolvency, we expect you to explain whether the scheme could enter the Pension Protection Fund and what this could mean for their benefits.

At the same time, you will need to take steps to understand and manage any impact of the event on the scheme in line with any contingency plan you have in place.

Related content

Protecting schemes from sponsoring employer distress
Guidance for DB scheme trustees, offering practical recommendations for spotting signs of corporate distress, and how they can protect their pension scheme.

Decide how to respond to a possible event

If it looks like an employer event is occurring that could cause concern to defined benefit pension scheme members, the trustees will need to decide how to respond.

You should start by asking the employer for as much information as possible about the situation. It will help if you enter into an information-sharing arrangement with the employer. Use this information to assess the potential impact of the event on the scheme and its members.

Communicate with members

Pension scheme members may become very concerned about the impact of an employer event, particularly restructuring or insolvency.

If possible, and if it is appropriate, you should communicate with members before or when the event in question commences, so that any member concerns can be addressed in a timely manner. The trustees will need to consider factors such as the likelihood of the event occurring and the level of commercial sensitivity. This may depend, for example, on:

• how likely the event is to happen
• the likelihood of members being made aware of the event via other routes
• the potential impact on the scheme and its members
• how likely members are to start making decisions that are not in their best interests

Employer covenant

If it looks like an employer event is likely to happen, you should review the impact on the employer covenant and the scheme. For more information, read our guidance on assessing and monitoring the employer covenant.

Mitigation and clearance

If you believe an employer event is materially detrimental to the scheme’s ability to meet its liabilities, you should raise your concerns with the employer, ensure appropriate mitigation is being considered, and enquire if they will be considering applying for clearance from us.

You can find examples of material detriment in our clearance guidance.

Incentive exercises

The employer may also want to carry out an incentive exercise or try to change the benefits in the scheme, either for future or past service, to reduce risk or cost associated with the scheme. This involves offering members the option to transfer out of the scheme or to change their benefits.

If an incentive exercise is proposed, you should look at your communications and support process for members to help them make informed decisions and better choices. You should also make sure the exercise is carried out in a fair and transparent manner.

We expect trustees to follow our guidance on incentive exercises and we expect employers and their advisers to follow the good practice set out in the industry code.

Trustees and employers should follow best practice when conducting any exercise designed to make members aware of their options under the scheme, including the ability to transfer out.

Trustee toolkit online learning

The 'How a DB scheme works' module contains information on the employer covenant and corporate transactions. You must log in or sign up to use the Trustee toolkit.

Update scheme members

If an employer event happens the trustees should update defined benefit scheme members so they don’t panic and make rash decisions about their pension benefits.

You should work with the employer and advisers to send an initial communication to members. This should:

• explain the current situation
• tell them that they will be updated when more details become clear
• direct them to information about their rights

Work with the employer

Make sure you have the latest information from the employer so that you can inform scheme members.

You should agree upfront how the trustees, employer and any advisers will work on communications to members. This includes when to communicate with members during the process.

It may not be appropriate for the employer to have approval rights for communications. However, you should consider providing copies to the employer before their release so that human resources managers, for example, are aware of the content.

Similarly, you should ask the employer to share in advance with you any communications that they plan to send to their staff about an employer event.

Sub-committee

It may not be practical for all trustees to be involved with drafting the member communications. You should consider setting up a sub-committee of the trustee board with delegated authority to approve communication materials. You may also be able to use an existing sub-committee.

Where an employer is in a stressed situation, it is likely that the full trustee board will need to meet significantly more often than usual. If you delegate communications activity to a sub-committee, they should brief the board at these meetings.

Effective communications

Consider how you can communicate most effectively with members. This includes deciding whether to use electronic or paper-based communications and writing in plain English. For more information, read the good communications guide from Pension Quality Mark.

Make sure you comply with data protection legislation. For more information, read the GDPR Made Simple guide from the Pensions and Lifetime Savings Association.

Plan your response to the event

You should use your contingency plan to help you to manage your response to the event.

If it looks like an employer event is likely to happen, you should review the impact on the employer covenant and the scheme to determine if it would be appropriate to seek mitigation in respect of the event.

If your trustee board doesn’t have experience of dealing with an employer event, you may need to take advice on the best way to plan your response. This includes taking advice on negotiating proposed changes with the employer.

Communications plan

You should create a response plan that sets out how to deal with communications to members and stakeholders, and inbound communications from these parties.

You will need to do the following:

• Choose whether to use electronic or hard-copy communications, or both. In a fast-moving situation, the lead time to print and send hard-copy communications may mean the content will be out of date by the time it is received.
• Consider whether to tailor communications to different member audiences. For example, where the impact of changes to the scheme varies between active, deferred and pensioner members, or across different sections of the scheme. This may add to the cost and complexity of the process.
• Carefully judge the frequency of communications during what may be an extended period.
• Make sure there is a clear route for incoming enquiries. The scheme secretariat or administrators could set up a dedicated email address or phone line for members. Or they could make sure there is clear signposting for members within existing communication channels (eg options on a call menu).
• Prepare briefing sheets and questions and answers for the scheme administration team.
• Ask the scheme’s legal advisers to review the draft communications.
• Be ready if communications with members enter the public domain and their content is reported by the media. You may need to produce a reactive statement and questions and answers to deal with media enquiries.

The Pensions Regulator or the Pension Protection Fund may have been actively involved with the scheme and referred to in proposed communications to members. You should not issue the communications without giving these stakeholders the opportunity to provide feedback on them.

Member concerns may be heightened at points in the process by media or other speculation. However, you are responsible for the accuracy of all communications and may not be able to provide substantive comment.

Members can contact MoneyHelper for general guidance about their pension.

Check contact data

You should check that the scheme administrator has all the contact data they need for members by audience. This includes active, deferred and pensioner members.

Measure the effectiveness of communications

You should regularly monitor and measure how effectively the communications address member concerns.

Member-nominated trustees can be a valuable source of feedback. You could also use standing forums (consultation groups) to engage with members.

Employer events leading to member consultation about scheme changes

In some cases, an employer event may lead to changes that the employer wishes to make to the scheme.

Employers will need to consult with the scheme members about certain changes. For example, to reduce pension costs going forward, the employer might decide it wishes to close the scheme to future accrual or increase member contributions, which are just some of the situations where it will be necessary to consult members.

Employers may also seek to reduce their pension costs by proposing other types of changes which may require members to consent the changes. This might include the following:

• Certain proposed changes to members’ accrued benefits. See our code of practice on modification of subsisting rights for more information.
• Liability management exercises such as enhanced transfer values or pension increases, ie incentive exercises.
• Transferring members’ benefits to another scheme. This might be because of a sale of the employer or a scheme merger or demerger, or where a successor scheme is offered following a regulated apportionment arrangement.

In all these cases, trustees need to ensure members are given all the information they require to make informed decisions. You should work with the scheme administrator to make sure all members have been contacted by the employer.

All of these types of scheme changes, especially those where the employer is proposing changes on the grounds of scheme affordability, may make members nervous about the security of their benefits so it is important to prepare to answer member queries and be alert to an increase in cash equivalent transfer value (CETV) requests.

Financial advice

Scheme members may want to speak to a financial adviser about how the pension scheme changes affect them.

You could check if the employer would be willing to provide access to an independent financial adviser or a panel of advisers.

If not, you should direct members to:

• use MoneyHelper for general guidance
• find an adviser using the MoneyHelper retirement adviser directory
• check if their adviser is authorised by using the Financial Conduct Authority financial services register

Make sure you don’t provide financial advice to scheme members unless you’re authorised to do so. For more information, read the guide to providing support with financial matters without needing to be subject to regulation (PDF, 293kb, 14 pages).

Effective communications

Work with the employer to consider how they can consult most effectively with members. This includes deciding whether to use electronic or paper-based communications and writing in plain English. For more information, read the good communications guide from Pension Quality Mark.

Make sure you comply with the General Data Protection Regulation (GDPR). For more information, read the GDPR Made Simple guide from the Pensions and Lifetime Savings Association.

Agreeing final changes to the scheme with the employer

In most cases, you need to agree final changes to the scheme with the employer.

Work with the employer in an open and transparent manner to agree a scheme change that strikes the right balance between the needs of the scheme and the employer.

Tell members about changes agreed to the scheme

If changes have been agreed to the defined benefit pension scheme the trustees should make sure that members are updated.

You should explain to scheme members what is happening and whether they need to take any action. Members can either accept the outcome of the consultation or ask to transfer to another pension arrangement.

You should work with the scheme administrator to make sure all members have been contacted.

Financial advice

Scheme members may want to speak to a financial adviser. You could check if the employer would be willing to provide access to an independent financial adviser or a panel of advisers.

If not, you should direct members to:

• use MoneyHelper for general guidance
• find an adviser using the MoneyHelper retirement adviser directory
• check if their adviser is authorised by using the Financial Conduct Authority financial services register

Make sure you don’t provide financial advice to scheme members unless you’re authorised to do so. For more information, read the guide to providing support with financial matters without needing to be subject to regulation (PDF, 293kb, 14 pages).

Effective communications

Consider how you can communicate this information most effectively with members. This includes deciding whether to use electronic or paper-based communications and writing in plain English. For more information, read the good communications guide from Pension Quality Mark.

Make sure you comply with the General Data Protection Regulation (GDPR). For more information, read the GDPR Made Simple guide from the Pensions and Lifetime Savings Association.

Incoming enquiries

You should have identified how to handle incoming enquiries from members and stakeholders when you planned your response to the employer event.

Check to see how the arrangements are coping in case you need to make any changes.