COVID-19: Pensions issues for employers and trustees of workplace pension schemes
There are a whole range of issues that pension trustees, employers and their advisers are facing as a result of COVID-19.
There are a whole range of issues that pension trustees, employers and their advisers are facing as a result of COVID-19 (coronavirus). There have been some key developments since our last article on this topic, and we have pulled together the latest news from the Pensions Regulator.
The key issues for trustees and employers to focus on have not changed. These remain the immediate risks facing scheme members:
- benefits need to be paid;
- the risk of scams needs to be minimised;
- employers need to continue contributing; and
- savers need support to make good decisions in these challenging circumstances.
By now, employers and trustees should have contacted their professional service providers, such as insurers, administrators, payroll providers and scheme actuaries to ensure that these essential functions will not be affected during this period.
As we stated in our last article, the ongoing crisis is throwing up unprecedented challenges and market turmoil, and things are changing on a daily basis. The Weightmans Employment, Pensions and Immigration team remains committed to providing clients with our usual high standard of service during this difficult period.
Immediate concerns for all trustees and employers
It is worth repeating the advice from our pervious update that, for DB schemes, the value of schemes’ investments and the strength of employer covenants may have been compromised by the Covid-19 crisis and trustees ought to consider their obligations in light of such developments.
For all types of trust based scheme it is likely that trustees will be faced with increasing enquiries from members looking to transfer benefits out of schemes. Trustees must be alive to the risk of fraud and urge their members to exercise extreme caution if seeking to transfer funds out of schemes. Trustees are recommended to advise any would-be transferring members to consult the ScamSmart website.
During the crisis, the Pensions Regulator has intimated that minor administrative infractions are likely to be forgiven, in light of the prevailing circumstances, with the focus being on getting employers and trustees back on the right track. Nevertheless, employers and trustees should aim to continue to adhere to appropriate standards of governance and follow usual protocols as far as is possible.
Our last update focussed on general principles for employers and trustees. Since then, more specific guidance has been produced which we summarise below.
DC Schemes - Maintaining pension contributions
Do I have to continue paying pension contributions?
Even if employers are making a claim under the Coronavirus Job Retention Scheme (CJRS), normal payroll processes must continue as usual. Deductions such as tax and national insurance contributions as well as pension contributions will continue to be made from employed or furloughed member of staff’s pay and paid as usual. Employers’ and furloughed staff’s pension obligations remain unchanged and employers must still pay staff and employer pension contributions over to the pension scheme.
Employers paying more than the statutory minimum contribution
If employers are paying more than the 3% automatic enrolment statutory minimum contribution, the excess will not be funded by the CJRS. Alternatively, if an employer is paying a higher minimum contribution under self-certified automatic enrolment they will only be permitted to claim a maximum of 3% employer contributions. Employers should continue to make the correct contributions due under the scheme and in many cases will have to pay a proportion of the pension contribution cost.
Reducing the employer contribution to the statutory minimum
For pension schemes where the employer contribution is more than the statutory minimum, employers may be able to decrease it to the statutory minimum (contributions cannot be reduced to below the statutory minimum).
There are a number of factors to consider when deciding to decrease the employer contribution including:
- Employment contracts with staff and whether any changes need to be made.
- Any agreements with recognised trade unions or other staff representative forums to discuss or notify of such changes.
- The rules or governing documentation of the pension scheme. The rules may include scope to reduce contributions to the statutory minimum or may require a change to the scheme rules. For trust based schemes, this will likely involve a negotiation between employer and trustees.
- Whether there is a requirement to consult with members when making changes that decrease employer contributions.
Before reducing employer contributions we would advise that you seek pensions legal advice.
Employer consultation requirements
The requirement under pensions legislation to consult on certain changes applies where there are at least 50 employees.
Before deciding to decrease the employer contribution, a consultation with employees would normally be required lasing a minimum of 60 days.
However, if all of the following apply, the Pensions Regulator has indicated that they would not take action if the 60-day consultation is not complied with.
- Employers have furloughed staff for whom a claim is being made under the CJRS.
- Employers are proposing to reduce employer contributions to a DC scheme in respect of furloughed staff only. For staff who have not been furloughed the existing pension contribution rate will continue to apply.
- The reduced contribution rate for furloughed staff will only apply during the furlough period, after which time it will revert to the current rate.
- Employers have notified affected staff and their representatives to describe the intended change and the effects on the scheme and on furloughed staff.
This regulatory easement will be maintained until 30 June 2020, but may be extended based on conditions at the time.
Pension contributions and salary sacrifice
The existence of the grant available under the CJRS does not change an employer’s usual pension contribution payment obligations or processes.
When calculating the pension contribution due for a furloughed worker who has agreed a salary sacrifice arrangement for pension contributions, any contractual obligations or obligations in the pension scheme rules continue to apply as normal.
However, as all of the grant claimed must be paid to a furloughed worker in the form of money (subject to permitted deductions) this may mean that, where a salary sacrifice arrangement is in place for pensions, an employer will need to amend their payroll processes to calculate the pension contribution to be paid to the pension scheme under the pension scheme rules.
Under salary sacrifice arrangements the obligation on the employer is usually to pay the total contribution, however it is calculated. In most cases, the scheme rules or governing documentation will define pensionable pay as the notional pre-sacrifice pay. The amount the member of staff sacrifices is paid across to the pension scheme as part of the overall employer contribution.
The government’s guidance on the sets out that when calculating 80% of a furloughed worker’s salary or wage, the reference salary or wage to use is the amount after the salary has been sacrificed. The pay during the furlough period should be treated as the post-sacrifice pay so that no further sacrifice is made on that amount.
Any contractual obligations entered into as part of the salary sacrifice arrangements and the obligation in the pension scheme rules continue to apply as normal, so the first step for an employer is to consider their contractual arrangements.
If, as a result of these contractual arrangements, pay cannot be reduced then employers must continue to pay furloughed workers their full pay and calculate pension contributions and the salary sacrifice element as usual on this pay. If this is the case, a grant under the CJRS would only cover the lower of 80% of furloughed workers’ pay or £2,500 a month plus the associated employer’s national insurance contribution costs and the employer’s pension contribution up to the level of the Auto-enrolment statutory minimum employer contribution.
This is a complex area, and employers operating a salary sacrifice arrangement should seek urgent advice as to how to fulfil their contractual obligations to furloughed staff.
Amending salary sacrifice arrangements
HMRC has advised that COVID-19 counts as a life event, meaning that the terms of a salary sacrifice arrangement could be changed, if the relevant employment contract is updated accordingly with agreement.
If an employer wishes to change the pension contribution payment obligation in the pension scheme rules or governing documentation to reduce the contribution that they pay, they will need to consider the same factors as employers wishing to reduce their pension contribution to the automatic enrolment statutory minimum employer contribution. In addition, employers with at least 50 employees are legally required to consult if they wish to introduce member contributions, or increase existing contributions.
DB Scheme Funding - requests to suspend or reduce deficit repair contributions (DRCs)
- Where sufficient information is not available to make a fully informed decision, trustees should, where appropriate, agree to requests to suspend or reduce DRCs for as limited a period as possible while appropriate information is being provided. Trustees will need to carefully consider any requests to suspend/reduce DRCs if they are expecting annual or substantial contributions (e.g. where a one-off, large, single payment is due or where DRCs are paid annually and the next one happens to fall in the suspension period).
- In agreeing DRC waivers, trustees should ensure that banks and other funders are being supportive and that no dividends, or other distributions are being made from the employer.
- The Pensions Regulator cannot waive trustees’ statutory obligations, but has indicated that it will not take regulatory action in respect of late reporting or a failure to make contributions during the period of 3 months from 27 March 2020.
Requests to suspend or reduce payments for future service
- Requests to suspend or reduce future service contributions, for the employers and possibly members, should be treated in the same manner as requests to suspend or reduce DRCs. However, there are additional issues trustees should consider (such as whether this is allowable under scheme rules or whether this will trigger a winding-up) and legal advice should be sought.
- Trustees may decide to suspend cash equivalent transfer value (CETV) quotations and payments to give themselves time to review CETV terms and/or to assess the administrative impact of any increase in demand for CETV quotes.
- Should trustees decide to do this, the Pensions Regulator won’t take regulatory action during the period of 3 months from 27 March 2020 against trustees who suspend CETV activity.
While the Pensions Regulator seems committed to a pragmatic approach to fulfilling its duties during the current crisis, there are complex issues which must be dealt with by employers and trustees. At Weightmans, our experienced pensions and employment lawyers are well placed to guide you through the next few months and help you come out of the other end of this situation in the best possible shape.