‘Fire and rehire’ – An impact of the new regime for pension scheme liability management exercises?

The Employment Rights Act 2025 introduces significant changes to UK employment law being phased in across 2026 and 2027.

Among many things, the Act makes changes to the practice of dismissing workers and then re-engaging them on different terms (so-called ‘fire and re-hire’). At first blush this may not appear relevant to pension schemes and pension scheme changes, although as Edwin Mustard and Deborah Miller examine, the new fire and re-hire restrictions expressly include contractual changes to pensions or pension schemes, and, in some cases, could impact changes being considered as part of pension scheme liability management exercises.

Pension scheme rights and employment contract rights

An employee and scheme member has two potential sources of rights – those against the pension scheme and its trustees as beneficiaries of the trust, on the one hand, and those against the employer as part of the employment contract, on the other.

Both of these were historically seen as two distinct rights, but over time the distinction has become more blurred. In many cases, the employment contract will say little in the way of rights to pensions or a particular level of pension benefit, often only referring to an employee’s right to join a scheme (if eligible), subject to the provisions of the governing trust deed and rules of the scheme in force from time to time.

This directs the member to rights available under the pension scheme – and typically an employer’s right to terminate and vary the scheme – rather than the employment contract. Incorporating an employer’s right to amend or terminate reflects the more common practice of flexibility under the employment contract for making future service changes.

In other cases the position could be more uncertain. Although much less common, the employment contract could refer to express commitments to a particular level of benefit or scheme, such as on a final salary basis, or to the continuation of a particular scheme. Senior executive contracts, for example, can be more bespoke than the standard term contracts in issue and contain a greater description of scheme benefits. Even then, this may not amount to a promise that the scheme will continue in existence.

A variety of documents – such as an offer letter, formal contract or other terms that are incorporated into the contract – could all form part of the contractual documentation. And some of these may have changed over time to reflect a change in the employee’s role. There could also be circumstances where particular benefits could have been built up over a long period of time and due to other surrounding circumstances, and the conduct of the parties, potentially become an implied term of the employment contract.

As noted, it is unusual for specific pension rights to expressly form part of an employee’s rights under the employment contract but, as explained, there could be areas where pension schemes or particular benefits are more contractual in nature. Each circumstance will be different and require careful analysis of the employment terms issued, and any implied terms, on a case-by-case basis.

Closure to all benefit accrual, the removal of a salary link, or an employer’s proposed withdrawal from a particular pension scheme are examples of areas that could potentially involve rights more contractual in nature depending on the wording of the employment contract and wider surrounding circumstances.

Where does fire and re-hire fit in?

An employer may wish to consider a change involving withdrawing a pension scheme benefit or making changes that are less attractive for future service.

The pension scheme aspects are likely to involve considering the scheme amendment power under the scheme terms to see if the change could be made.

From the employment contract perspective, however, where the benefits sought to be changed form part of the employment contract rights – although, as above, that is by no means certain – there is a risk that without obtaining employee agreement to the change, the employer could be in breach of the employment contract by forcing the change through.

One approach that has been used by employers to force through a change where rights to pensions and pension benefits exist under the employment contract, and where no agreement could be reached, is to seek a termination of the existing employment contract and re-engaging the employee on a new contract that reflects the less advantageous pension terms. Otherwise known as: fire and re-hire.

This is an extreme, typically last resort, action to take and is not itself without risks, but nevertheless is a tool in an employer’s toolbox should it be required. However, fire and re-hire using this method is now addressed in the Employment Rights Act 2025, which means employers need to be aware of it if contemplating changes of this kind.

Employment Rights Act 2025

When brought into force, Section 28 of the Employment Rights Act 2025 (expected to be with effect from January 2027) will amend the earlier Employment Rights Act 1996. This change provides that it will be automatically unfair to dismiss an employee for refusing to accept a change to a contractual term that is a ‘restricted variation’.

Changes relating to pensions or pension schemes are included within the definition of ‘restricted variations’ in the new legislation, meaning that the practice of termination of employment and re-engaging on new terms (where pensions or pension scheme terms are contractual) is caught by these new provisions.

There is a limited exemption where the change being proposed is to eliminate, prevent, or significantly reduce or significantly mitigate the effect of any financial difficulties that affect employer’s ability to carry on business as a going concern. It is expected that this will be a high bar that will be difficult to meet in most cases.

Thus, the new changes, when introduced, will catch changes to pension schemes where the rights are contractual – which as mentioned is by no means a certainty – and where no agreement has been reached, with a wish to terminate employment and re-engage on less favourable terms.

Conclusion

While some of the details related to these changes are still to be confirmed in a new Code of Practice, in the more unusual scenario of pension rights being contractual and employees having a contractual right to continue benefits on an existing basis, employers now need to consider the changes being brought in under the Employment Rights Act 2025 if contemplating a change to these terms after January 2027.

The new legislation will make it considerably harder for employers to make changes to any pensions or pension scheme terms which are contractual without individual or collective agreement. Employers should seek advice on implementing any changes that may be impacted by the new legislation.

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