The FTSE-listed tobacco specialist has announced proposals to make staff chose between a new defined contribution plan or face dismissal in order to reduce its long-term liabilities
Molins, a tobacco services specialist listed on the FTSE Fledgling Index, has become the latest medium-sized employer to propose closing its defined benefit scheme.
Regulator’s guidance on scheme closure
The Pensions Regulator requires employers to consult with representatives of affected workers when making changes to future pension arrangements.
The regulator’s guidance to employers states: “Employers should not make employees feel that the proposals will be implemented irrespective of how they respond to the consultation.
“For example, by seeking decisions during the consultation period on options arising out of the proposals.
“Employees who have not agreed to the proposals should not be treated any differently than those who have agreed to them.”
The company plans to go down a controversial route of making staff sign new contracts – with their career average scheme replaced with a defined contribution arrangement – or face dismissal.
Medium-sized companies are finding it harder to attract credit from lenders if they sponsor a DB scheme. Molins said the move was part of a strategy to manage investment and longevity risks.
But companies looking to follow its lead and close their DB section in this way run the risk of alienating members and facing claims for unfair dismissal.
The move has been criticised by unions and trustees, but lawyers claim the strategy is legal, if unusual.
“This is like using a sledgehammer to crack a nut,” said Jane Samsworth, partner at Hogan Lovells.
But she added the strategy had been used by some companies whose power of amendment would not allow them to close their schemes.
Indecent proposal
This week the Molins management team has been holding meetings with all employees to make them aware of the proposals to close the DB scheme.
In a letter to staff – seen by schemeXpert.com – the company claimed this decision was made due to challenging market conditions and increasing longevity.
The consultation to end the scheme has already begun, with the closure scheduled for November 30.
The letter to staff stated: “In the event of an employee deciding... not to agree to the variation of their contract of employment, one of the things the company will need to consider is whether to give notice to terminate the employee’s contract.”
In this scenario, the staff would be offered their former jobs, but with a DC scheme rather than a DB scheme.
Threatening to sack their staff in order to get out of providing them with a decent pension does not appear to us to be anything like the highest standards of ethical behaviour
John Gray, AMNT
The company has already written to the Insolvency Service – a division of the Department for Business, Innovation and Skills – to make it aware of a potential 179 affected jobs.
“This is a test to the 2006 pensions regulations, which quite clearly state an employer’s consultation with the workforce has to be meaningful,” said John Gray, Association of Member Nominated Trustees (AMNT) committee member.
He added Molins appeared to be in breach of its own ethics policy, which commits the group to operating to the "highest standards of ethical behaviour".
“Threatening to sack their staff in order to get out of providing them with a decent pension does not appear to us to be anything like the highest standards of ethical behaviour,” Gray added.
One of the aims of the AMNT is to support trustees of DB schemes threatened with closure.
The Molins management team was contacted for this article, but have so far declined to comment.
But lawyers have claimed Molins’ strategy is not illegal and has been used by companies that are unable to change their scheme’s power of amendment.
“This may seem onerous, but I have carried these out before,” said Anne-Marie Winton, partner at Nabarro.
She said companies could avoid members accusing them of unfair dismissal and get 100% of staff to sign up to altered pension benefits if the proposals were communicated clearly.
Samsworth said the regulator was unlikely to act against Molins as long as the company offered a minimum of 60 days for consultation and included representatives of all members.
Molins’ financial position
The Molins scheme has liabilities in excess of £300m and its last actuarial valuation, carried out as at June 30, 2009, showed a deficit of £12.1m.
The company has a market capitalisation of £23.3m.
In 2009 the company and scheme agreed a deficit recovery plan where the company made annual payments of £1.2m to the scheme. The next valuation is due in June this year.
In addition to the annual deficit payment, Molins currently pays £500,000 a year in contributions to the scheme.
It estimates this will drop to £435,000 a year in the new DC scheme. But with national insurance and insured benefits payments, Molins claims it could pay up to £685,000 a year under the proposed arrangement.
Molins has undertaken a series of measures in the past few years to limit the size of its pension liabilities.
It switched from a final salary to a career average arrangement in 2006, and altered the inflation protection for some members.
It also offered members pension increase exchanges and last year closed its US pension scheme to future accrual.
