Defined Benefits or Defined Contributions?
Many housing associations are currently grappling with the challenges thrown up by membership of the SHAPS pensions scheme and, in particular, the liabilities associated with final salary and other defined benefits (DB) options. Recently described by Employers in Voluntary Housing (EVH) and Unison as "the biggest industrial relations challenge the sector has faced", many boards are presently facing weighty decisions on whether to cease to offer final salary accrual options and ordain that all future benefits be offered under the Scottish Housing Associations' Pension Scheme (SHAPS) or another defined contribution scheme.
Some RSLs are proposing to make the changes effective from 1 April 2014 to tie in with the new financial year and have already served the three months' notice required under the Scheme rules. EVH and Unison have a few weeks ago jointly asserted that "April 2014 decisions could have a deleterious effect on morale, trust and industrial relations" and that employers should consider committing to a longer period of consultation. This may have caused some jitters for those employers who have already committed to a change in pension provision and have been trying to manage industrial relations fall out.
Though the recommendation has no legal status and may not persuade employers to change direction at this late stage, it may well place the issue squarely back onto committee agendas to consider this suggested stay of execution and take stock.
New Government figures show that the median amount of saving in a defined benefit scheme (known as a DB or final salary scheme) is £178,000, compared with just £29,000 for those in a defined contribution (DC) scheme. Depriving employees of access to such a valuable benefit has the scope to be a controversial and unpopular decision. Nonetheless, the costs and risks associated with DB schemes is causing employers across sectors up and down the country to close them: the Pensions Policy Institute projects that the number of active DC savers will increase from 6.6 million today to 16 million by 2020.
So what are the key issues which management committees will be pondering? Naturally, associations will be focusing on actuarial projections in considering the options available for future provision. No doubt a further feature in the thinking will be the impact of auto-enrolment on the organisation and whether it is affordable to auto-enroll employees who are not current final salary scheme members into a DB scheme. If not, the desire to avoid a two-tier workforce may provide a further impetus to consider reviewing existing final salary provision. In terms of implementation, RSLs require to consider whether they are caught by the 2006 Regulations which require statutory minimum consultation over changes of this nature for employers with 50 or more employees.
Another aspect which can easily be overlooked is whether employees' contracts of employment actually permit the association to cease to offer final salary accrual. Though there is no doubt the Scheme Rules allow withdrawal on giving notice, a separate important legal question is whether employees have a contractual right to participate in final salary schemes based on their employment contracts. There is a mish-mash of style contracts within the sector and indeed often within organisations, which can mean the position may vary as between employees under one roof. The potential risks of imposing a withdrawal of the final salary scheme where the employee's contract does not permit this could be high. They may be able to litigate to recover their losses in the employment tribunal or civil courts. Given the value of final salary benefits such losses could be substantial, depending on the age, salary and length of service of the individual.
Where employees appear likely to have a contractual entitlement, there are still options for introducing the changes lawfully through a carefully managed "fire and re-hire process" (if employees' consent cannot be obtained). However it will be important to follow a fair procedure which will involve careful planning and cannot be left to the eleventh hour.
Pause for thought
Whether or not the recommendation from EVH and Unison convinces RSLs to put their plans on hold, it may encourage an opportune review of any decision to ensure that all aspects of the matter and any risks associated with proposals have been comprehensively considered.