Achieving legacy pension product simplification through unilateral contract variation

Simplification can be a real positive for many, but it’s not generally practicable to obtain consent to associated changes from a large population of customers. A key component of the legacy simplification toolkit which can help firms achieve simplification is ‘unilateral variation’. The concept is straightforward: firms often reserve the contractual right to change policy terms and conditions over time – so unilateral variation is simply the exercise of those rights. In effect, it is a way to proceed without customer permission or written agreement.

Administration upgrades

Moving legacy pension schemes to an updated, modern administration platform should generally be in the interests of all affected customers. It also plays well to operational resilience expectations and good customer journeys. But legal obligations in legacy policies will typically align with the capabilities of a legacy administration platform and sometimes describe features which have fallen out of use.

Together these create a list of quirks and idiosyncrasies that need to be smoothed out so that the new system can deliver harmonised administration across books of legacy business. Some of these exercises have been undertaken behind the scenes at an administrative rather than legal level, which means that legacy policies are now misaligned with legal rights. This stores up a risk within legacy products if the benefits delivered by the administration practice may be different to those promised under the customer policies. 

Negative affirmation

Exercises have also been undertaken on a so-called ‘negative affirmation’ basis, meaning that the firm has gone ahead with changes on the strength of policyholder non-objection. Although negative affirmation is a convenient approach, it generally lacks any solid foundation in law. Contractual changes typically either need policyholder consent or they do not. If the changes do need consent, then ‘non-objection’ from policyholders would generally fall short from a legal perspective. 

Unilateral variation

Unilateral variation is helpful because it enables necessary changes to contracts of indeterminate duration. As a result, it gives legal authority to changes that would otherwise be vulnerable to challenge. As such, it could be seen as a useful form of risk management.

It is, of course, not a silver bullet. Unilateral variation powers, if they exist at all, are often limited in nature and it is important to consider whether the specific operational changes can be linked to some specified authority in the policy variation power. These could include changes to law and tax, concerns about fairness, or circumstances where it is no longer possible to give full effect to the terms of the policy. The wording and exercise of unilateral variation powers are also subject to a stringent consumer safeguards regime.

Addressing potential customer detriment

Because of these issues, it is important to consider precisely what any proposed changes do to customers’ legal rights. That process involves some detailed ‘compare and contrast’ due diligence on old and new policies to identify the changes and assess the impact on customers.  Often with simplification projects, changes are generally positive – or at least neutral – but it is possible that some changes can result in potential detriment circumstantially for some customers. 

While unilateral variation rights can provide legal authority for changes, and therefore safeguards against successful challenge, that authority will be strained where something of value is removed. This is not necessarily a barrier to running a change project on a unilateral variation basis, but it makes customer mitigation part of the process – something that is often front of mind with providers in any case. Adopting this process of identifying and addressing potential customer detriment, unilateral variation gives financial services businesses the chance to modernise on a risk managed basis.