What to do from our latest thoughts and observations?
- Be alert to minimum contribution and regulatory requirements if the employer and/or employee is considering reducing their pension contributions
- Employee consultation and consent may be required where employers are looking at changing contributions and/or investment structures
- The Government’s furlough scheme covers employer auto-enrolment contributions. It appears that employers would be responsible for contributions above auto-enrolment minimums – although further clarity is required from the Government. Employers considering altering pension arrangements for furloughed employees should seek legal advice.
We’ve been asked a number of questions from employers recently about options and what to do relating to their defined contribution (DC) pensions. These include an array of arrangements such as occupational trust-based schemes, master trusts, GPPs or stakeholder schemes.
Whilst we recommend that employers and/or trustees take legal advice on any issues with implications under pension or employment law before any action is taken, there are some ground rules to cover off.
We thought it might be useful to provide a guide on the immediate COVID-19 questions from a pensions perspective (note: information is correct as at 21 April 2020).
Can employer pension contributions be reduced?
The minimum that UK employers have to pay into DC pension schemes in 2020/21 is 3% of earnings between £6,240 and £50,000 per year (pro-rated for the actual pay frequency) and contributions cannot be reduced below this level.
Employers voluntarily paying contributions above this amount could potentially reduce contributions, as long as they do not reduce below this minimum level. However, reducing employer pension contributions is a listed change potentially requiring a consultation under pension law.
Failure to consult would not invalidate any change that is made; however, The Pensions Regulator could impose a fine on the employer and also issue an improvement notice which might negate any financial benefit of imposing any change without consultation.
Trust-based schemes may also have restrictions on changing employer contribution rates or the pensionable salary definition within the scheme documentation, therefore, it is essential to check scheme rules and the (payment) schedule of contributions before considering any changes.
What are the pension consultation rules?
In certain circumstances, employers have to consult with their employees, or their employees’ representatives, before certain changes can be made to their pension scheme.
Broadly the requirements apply to employers with at least 50 employees but current consultation legislation, including the exceptions can be found here:
http://www.legislation.gov.uk/uksi/2006/349/contents
Listed changes which trigger the consultation requirements include:
- Reducing contributions in respect of some or all members
- Requiring members to increase contributions or contribute where they previously didn’t have to
The consultation should be with active and prospective members who will be impacted and must include specific written details of the proposed change. Consultation should be for a minimum of
60 days, and the employer should also factor in a period to consider any responses otherwise there is a risk that the consultation is invalid.
An employer can ask the Regulator to waive or relax any of the consultation requirements but would need justification, for example, demonstrating that a delay would adversely affect the employer’s ability to remain solvent.
The Regulator can’t reverse a change that has been made without meeting the consultation requirements, but they do have the power to issue an improvement notice, setting out any corrective action the employer must take, and impose civil fines up to £5,000 against an individual or £50,000 against a company.
It should be noted that if employment contracts are being varied or terminated then consultation may be required under employment law as well as under pensions law. More information is available here:
https://www.gov.uk/your-employment-contract-how-it-can-be-changed
How does the Government’s furlough scheme deal with pensions?
Under the Government’s Coronavirus Job Retention Scheme, employers can claim for 80% of furloughed employees’ usual monthly wage costs (up to £2,500 a month), plus the associated employer’s National Insurance contributions and minimum automatic enrolment employer pension contributions on that wage.
Further guidance is expected from the Government on pensions. The current information implies that employers would continue to be responsible for contributions above automatic enrolment minimums for these employees if they have not been reduced through consultation.
If employee contributions are normally made by salary sacrifice this may mean that the employer is responsible for continuing to pay “employee” contributions as well, additional clarity may be given on this in future Government guidance. In the meantime, if employers are considering amending existing salary sacrifice arrangements as part of any furlough agreement with employees, they should take appropriate legal advice.
Can paying contributions to the scheme/provider be delayed?
There is a legal requirement to pay contributions to the pension scheme by the 22nd of the month following deduction and the (payment) schedule of contributions for trust-based schemes may require earlier deadlines. This has not yet changed as a result of COVID-19.
Ordinarily, the trustees or managers of the pension scheme are required to report an employer to the Regulator when contributions are more than 90 days late. However, the Regulator is reported to have contacted some pension providers to extend the reporting deadline from 90 days to 150 days in order to better focus on priority enforcement activities.
It is unclear whether there would be a reduced risk of fines or other sanctions from the Regulator although they have been quoted as saying that schemes should be as flexible as possible when agreeing payment plans so that some employers can pay auto-enrolment contributions over a longer period if necessary.
The Regulator has a number of enforcement powers to address issues such as late payment of contributions including fixed and escalating penalty notices (which can be as much as £10,000 per day) and they can also pursue civil action.
There are also employee relations risks associated with delaying payment of contributions. It is not uncommon for a proportion of employees to monitor their contributions via the pension portal (where these are available); therefore, late payment of contributions is likely to be visible to employees from an early stage.
Another consideration of deferring contributions is the potential investment loss incurred by employees, which could be significant if investment markets recover in the intervening period. In addition to the employee relations risks, the Regulator has power to apply interest to judgements but there is also a risk that the Pensions Ombudsman could rule that investment loss may need to be compensated if any employees challenged via that route.
Can employees change contributions?
Employers can allow employees to change their contributions, although trust-based schemes may have restrictions on changing employee contribution rates, therefore, it is essential to check scheme rules to understand any constraints where this is relevant.
Employers can make employees aware that they can reduce their pension contributions but importantly employers cannot encourage or “induce” employees to do so.
Employees can be allowed to save below the legal minimum contributions as an alternative to completely leaving the pension, but employers don’t have to offer this option. If contributions are reduced below the legal minimum levels the employee is deemed to have ceased membership of a qualifying scheme under automatic enrolment legislation and would, therefore, need to be considered for re-enrolment when appropriate. Under these circumstances the employer does not have to continue making employer contributions but can choose to do so.
Consideration should be given to any other benefits associated with pension scheme membership, such as life assurance, and whether steps should be taken to continue these benefits if employees do cease membership or to ensure implications are clearly communicated to employees.
If employers usually restrict contribution changes to certain points in the year, they can choose to offer more flexibility now if they wish to do so, subject to scheme rules for trust-based schemes.
Where employee contributions are made by salary sacrifice it is possible to allow employees to vary or revoke the salary sacrifice arrangement even where they have not experienced a lifestyle change. More information is available here:
Can the default investment strategy be changed?
It is important to remember that pensions are a long-term investment and therefore short-term decisions should be avoided; however, the market volatility related to COVID-19 might be a catalyst to review the default investment strategy in the DC pension scheme. The ability to do this will depend on the type of pension scheme.
Employers with occupational pension schemes can ask the trustees of the scheme to review the default and, if appropriate, the trustees will be able to make changes without needing the consent of members.
Employers who participate in master trusts can engage with the master trust trustees; however, they will consider the needs of the members across all participating employers before making any changes, unless the employer agrees a dual governance approach and supports the trustees in taking advice and action in respect of the membership in isolation.
Employers with GPPs or stakeholders have little influence on the standard default of the provider unless they have a blended or white label fund. It may be possible to change to an alternative default, or implement a blended fund, for new employees, relatively easily. However, changing the default fund for existing members will either require the written consent of each member or the agreement of the provider to make the change without member consent. This will need a recommendation from the regulated investment adviser and the approval of risk, investment and governance committees at the provider.