From IDS Pensions Bulletin 214, April 2008

United Biscuits moves to CARE Scheme

In December 2007 United Biscuits (UB) decided to close its final salary scheme to future accrual and replace it with a new CARE scheme for active members of its closed final salary scheme. We look at the new scheme and at how the company consulted with the affected members.

Scheme before CARE

The UB Pension Plan, like many pension funds, suffered when the equity markets fell between 2000 and 2003. This left the scheme with a deficit which needed to be addressed. Originally the scheme had been a 1/60 final salary scheme. However, due to rising pension costs the company decided to close the final salary scheme to new members in December 2005. In addition, a number of changes were made to the final salary scheme for benefits accruing for service from 1 April 2006. This included reducing the accrual rate from 1/60 a year to 1/70 a year.

These changes, unfortunately, did not sufficiently address the risk of the scheme deficit increasing in future and, therefore, the final salary section was closed to future accrual and replaced by a CARE section for future accrual of benefits for active members in December 2007.

CARE section

At the beginning of May 2007, members were informed of the proposed changes for consultation. The initial proposal involved the CARE section being contracted in to the State second pension (S2P), with an accrual rate of 1/90. The normal pension date remained at age 65 and members could continue draw their pension from age 60. Benefits built up under the final salary section would be paid without reduction for early payment from age 60, but any pension accrued under the CARE arrangement would be reduced for early payment. These reductions would be on a cost neutral basis. On retirement a member would have to draw both the final salary and the CARE pension at the same time.

Benefits which had already built up in the UB Pension Plan before the changes would be protected to ensure that members would not receive less than if they had left service on the date of change. The planned revaluation factor for these benefits was RPI capped at five per cent.

Many employees wanted to retain the right to retire at 60 on a full pension by paying an increased premium and there was suspicion that S2P would not retain its value over the term to retirement. During the extensive consultation exercise that followed the initial proposal, the company agreed a number of changes to meet employee concerns and make the proposal simpler.

It was decided that the CARE section could remain contracted out of S2P. This meant that the company could maintain the accrual rate at 1/70 which was in line with the final salary scheme – it also made the scheme much clearer and easier for members to compare and therefore helped improve the level of understanding for many employees. While standard pension contributions remained at seven per cent, the company now offered members the option of paying an additional five per cent premium to retain the right to retire at 60 on a full unreduced pension. Also, where members paid the enhanced contribution rate but retired later than age 60, the CARE pension element would be increased to reflect the fact that it was being paid later. The company also agreed that the pre-CARE and CARE pension benefits could be taken separately as they became available .

Following these changes a further communications exercise was undertaken to ensure that all members fully understood the new scheme. External pension consultants were used to carry out briefings and ‘one to one’ sessions were held on sites to ensure that any questions and concerns were answered and that members fully understood what they were being asked to accept. As a result the new scheme was accepted by members in a ballot.

What’s in IDS Pensions Bulletin 214