How to amend pension scheme rules

The provisions of a pension scheme may undergo regular changes during the lifespan of the scheme.

It is important to make sure that any changes made are valid as otherwise scheme benefits may not be correctly administered which could result in underpayments to members and an increase in the scheme’s liabilities. Follow our “do’s and don’ts” guide below to avoid finding yourself in this situation.

Do:

Check you have the power to make the amendment either under the scheme rules or legislation and that the power is being used for its proper purpose.
Make sure you understand the remit of the power you are relying on to make the change including who must exercise it (is it a sole employer or trustee power, a joint power or exercisable by one party with the consent of the other) and how e.g. by a deed, a written resolution and whether notice to members is required.
Make sure any documents needed to make the change have been entered into correctly e.g. if the power of amendment requires the trustees to agree to the amendment “in writing under their hands”, all trustees must have signed the relevant document. Even if a document is not needed to make changes e.g. the amendment power simply states that the employer can amend the scheme rules from time to time, we would recommend the change is formally recorded so that the amendment being made, and its scope, is clear.
Check whether there are any restrictions on the exercise of the amendment power under legislation, in particular section 67 of the Pensions Act 1995, or under the scheme rules e.g. the amendment power may prohibit the scheme rules from being altered to permit a return of surplus to an employer or may be drafted in such a way that, as a result of case law, means a final salary link must be maintained when using the amendment power to close the scheme to future accrual.
Check the document making the change before it is finalised to make sure it accurately details the change being made and complies with the formalities of the amendment power being relied on.

Don’t:

Make changes retrospectively unless you have obtained legal advice confirming that such a change is not prohibited by legislation or the scheme rules – usually retrospective changes worsening benefits payable to or in respect of members will be void or voidable.
Forget to check if employees need to be consulted about the changes proposed – depending on the number of employees employed by the employer and the change being made a consultation process may need to be carried out. Even if there is not a requirement to consult, it may be advisable to give prior notice of the proposed change to members.
Forget to check if actuarial advice is needed – some amendment powers require actuarial advice to be obtained before a change is made and failure to comply with this could make the amendment invalid.
Use the power of amendment to remove restrictions on how the amendment power can be exercised or to introduce additional restrictions unless the amendment power permits this.
Forget to keep an audit trail of the decision to agree to the change, the reason for it and any authorisations granted at trustee or company level and consents or agreements obtained in case the validity of the deed is questioned at a later date.

If you are unclear about any of the above, DO seek appropriate legal advice. Amending a scheme may seem like a straightforward process but this is not always the case and getting it wrong can be a very costly business.

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