Changing from final salary to career average accrual rates
Produced in partnership with Wyn Derbyshire of gunnercooke LLP
Changing from final salary to career average accrual rates

The following Pensions guidance note Produced in partnership with Wyn Derbyshire of gunnercooke LLP provides comprehensive and up to date legal information covering:

  • Changing from final salary to career average accrual rates
  • Reducing the financial burden of defined benefit schemes on employers
  • How can such a change be made?
  • Employer’s unilateral power to determine the definition of 'final pensionable salary'
  • Exercising the scheme’s amendment power
  • Obtaining members’ consents
  • Termination and recommencement of employment
  • Can the change affect benefits that have already accrued?
  • Employment law considerations
  • Employee resistance to change
  • more

Reducing the financial burden of defined benefit schemes on employers

Recent years have seen many employers seeking to escape or limit their exposure to the rising costs of defined benefit pension schemes and the risks that the operation of such schemes entail. Many employers have sought to achieve this by either restricting access to their defined benefits scheme (so new entrants are no longer admitted to membership) or, in more extreme cases, closing the scheme to the future accrual of benefits.

Alternatively, employers may be able to change the scheme’s operative provisions so that benefits accrue on a less generous basis. One way of doing this is to alter the scheme so that members no longer accrue benefits on a 'final salary' basis (ie by reference to salary at or near to the date on which pensionable service ends) but rather on a “career average” basis (ie by reference to salary averaged over a specified period, typically the relevant member’s period of active membership of the scheme).

Making such a change involves the worsening of benefits and poses challenges from both an employment law and pensions law perspective. Careful consideration of the potential risks and prior planning of the process (including the approaches to be made to both the members and the trustees) should help to minimise the potential risks.