Opportunities to save on UK pensions costs during the COVID-19 crisis

The UK Pensions Regulator has issued guidance for employers and trustees operating pension arrangements during the COVID-19 crisis. Additional guidance has also been provided by the Government in relation to the Coronavirus Job Retention Scheme and its application to pensions.

In what is a challenging time for the pensions industry, in this briefing, we set out some of the key issues which are relevant for schemes and their members in light of this guidance.

Contract-based defined contribution schemes

Coronavirus Job Retention Scheme - employers are able to recover minimum automatic enrolment employer pension contributions on top of an employee's capped salary. However, any additional contributions on salary above the cap will not be funded. Neither will contributions above the minimum mandatory contribution of 3%.

Although this is welcome, employers will still need to work through:

• Exactly what contributions employees are contractually entitled to,
  because there might be a gap between their entitlement and the
  available grant.
• Where contributions are paid through salary sacrifice, the salary
  sacrifice arrangement may need to be reviewed to see how it aligns
  with the new scheme for furloughed employees.

Automatic-enrolment - the Pensions Regulator has said that it expects employers to keep meeting their automatic enrolment obligations. If an employer is considering changing contribution levels in excess of these obligations, it will need to consider the contractual position and its obligations to consult with affected members.

Defined benefit schemes

Suspension or deferral of deficit repair contributions (DRCs)- The Pensions Regulator recognises that trustees are receiving requests to suspend or defer DRCs from employers in distress. The Regulator has said that trustees should be open to requests to suspend contributions if there is good reason to do so and that a period of 3 months may be appropriate, depending on the information which is available to the trustees.

Some of the factors which are relevant to trustees when faced with such a request are as follows:

• Trustees should be conscious of their duties to scheme members whilst
  balancing the importance of the employer's ongoing viability.

• Banks and other funders should be supportive and no dividends or
  other distributions should be made from the employer in such
  circumstances.

• The Regulator has recommended that trustees should take legal and
  actuarial advice when faced with such requests and ideally expects
  suspended contributions to be repaid within the current recovery plan
  timeframe.

Other issues relevant for DB schemes

• When considering contribution suspension and other issues it will be
  important to act within the rules of the scheme; do the rules allow
  suspension and what powers do the trustees have in such
  circumstances?

• If a scheme is still open to accrual, it will be key to understand in
  particular that a cessation of contributions does not inadvertently
  trigger a debt on the employer.

• Scheme investments will also be key, and schemes will want to ensure
  they have sufficient cashflow to meet their obligations as well as
  managing specific risks within portfolios and assessing whether
  investment triggers are still appropriate in the current climate.

• If trustees decide to suspend cash equivalent transfers for up to
  three months, the Regulator will not take regulatory action where the
  disclosure requirements are breached.

If you would like to discuss the implications for you and your pension arrangements, as well as potential solutions, please reach out to the contacts listed on this article.

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