Pensions: top tips for in-house lawyers
Published on 14th Dec 2020
In the world of pensions, where do you start? Here are our thoughts on the top ten things to think about
1. Automatic enrolment: take a critical look at any atypical employment contracts or arrangements
Automatic enrolment is not just for employees. It is also for 'workers'. A person's status will depend on the facts and a number of cases have now been brought on behalf of atypical workers, including those in the gig economy.
The company needs to review atypical employment contracts and arrangements because, if it does not identify everyone who is a 'worker', then it will not fully comply with its automatic enrolment duties and will risk enforcement action by the Pensions Regulator, plus civil and criminal penalties.
2. Automatic enrolment: have a plan for higher earners who may not need to be automatically enrolled
There are a few exceptions to the automatic enrolment duties. One of these is that an employer can choose not to enrol an employee/worker where it has reasonable grounds to believe that they have lifetime allowance transitional tax protection.
There are seven types of protection, including enhanced and fixed protection, and a new recruit might have applied to HMRC for one or more of them. The point to watch is that being enrolled into a new scheme can result in loss of protection, and loss of protection will expose the employee to additional tax of up to 55% on any pension savings above the lifetime allowance. The lifetime allowance currently stands at £1,073,100, which means that this issue tends to affect higher earners, but can affect other recruits too.
Employers do not have a duty to provide guidance to new recruits on the effect of automatic enrolment on protection but, to reduce the risk of complaint, they can:
- invite all new recruits to notify them of any tax protection (with evidence) and make sure they are not enrolled into the pension scheme; or
- issue standard pensions information to explain that everyone eligible will be enrolled and that anyone with tax protection should take their own financial advice and opt out if necessary.
Employers should also check that the death in service benefits they usually provide will not result in loss of tax protection.
3. Give information, not advice
Employers have to provide certain pensions information to their workforce, but do not have a duty to advise.
As a general rule, a company should give employees information about their pension rights if they would not otherwise be aware of those rights (particularly where the employee only has a short amount of time in which to take advantage of the rights). In providing this information, and any other, the company should avoid crossing the line and assuming a duty to give advice, because it could then be liable if the advice is incorrect or incomplete.
4. Know when the company is wearing a 'trustee hat'
Many employers have death in service schemes where life assurance or excepted group life policies are held under trust to provide benefits for employees/workers who die in service.
The employer will often act as a trustee of these schemes. This means that, if an employee dies and the insurer pays a lump sum, the employer must exercise 'trustee discretion' to pay the lump sum to one or more of the employee's beneficiaries.
'Beneficiaries' will be defined by the trust deed and rules and will typically include any spouse or civil partner, children, relatives, dependants and anyone nominated by an expression of wish. One of the first steps will be to identify everyone who falls within that definition.
The employer's duty in this scenario is to take account of all relevant factors, disregard all irrelevant factors and make a decision which a reasonable trustee would make. There are a number of points to remember, including that expressions of wish are exactly that – they are not directions and particular care is needed if the employee's situation has changed since the form was filled out.
5. Check the nature of the company's defined contribution (also known as money purchase) pension schemes
The Pensions Regulator oversees occupational pension schemes, being those written under trust and managed by trustees.
Personal pension plans, group personal pension plans and self-invested personal pension plans (SIPPs) do not usually fall within the Pension Regulator's remit. It does oversee compliance with automatic enrolment duties and the pensions consultation requirements that will apply if an employer wants to close a scheme (stop contributing to it for some or all members), reduce the contributions that it pays, or increase member contributions.
6. Consider whether scheme consolidation should be on your company's agenda
The Pensions Regulator has identified defined contribution occupational pension schemes with assets below £100m as ripe for consolidation.
The message coming through is that the scheme's trustees must be prepared to either demonstrate and certify effective governance and value to members, or consolidate with a larger scheme.
Consolidation is achieved by closing the pension scheme and enrolling the employees and workers into a larger arrangement. While they start saving into the new scheme, the pensions savings they built up in the old scheme can then either be transferred to the new scheme or secured with an insurer, allowing the old scheme to be wound up.
Master trusts – commercially run defined contribution occupational pension schemes for unconnected employers and authorised by the Pensions Regulator – are particularly popular consolidation vehicles.
Projects to harmonise and consolidate pension arrangements and pension terms are joint employer and trustee projects, requiring legal advice on contractual pension entitlements, consultation obligations, pensions tax protections and the suitability of consolidation vehicles and their legal documentation.
Watch out also for any historic executive pension defined contribution plans, which your company may have signed up to in the past for senior employees. These also require governance and would fall within the Pension Regulator's sights for consolidation. Open Trustees (our pensions trustee company) has a strong track record of managing such schemes to wind up.
7. Consider setting up a governance committee
Master trusts will generally not consider an employer's corporate objectives around retirement provision, particular employees as a distinct group, or their pricing against market movements. It may therefore make sense for employers to have some oversight of the master trust and monitor its quality, cost and service levels to its staff. Good governance and value to members are also important for group personal pension plans and SIPPs.
For this reason, more and more employers are choosing to establish governance committees to scrutinise and monitor their pension providers for quality of service, value and suitability for their workforce. These committees require a suitably diverse and representative board and terms of reference set by the company.
8. Watch out for hidden nasties from defined benefit schemes – acquisition risk
If you buy a shareholding in a company that used to participate in a defined benefit (final salary or CARE) scheme, that company could still be on the hook for its share of the pension liabilities if those liabilities haven't been paid-off or properly transferred to another company. When you buy the shareholding, you could inherit those liabilities.
If you buy the assets, liabilities and employees of another company and, before the transfer, the employees of that company had enhanced pension rights on early retirement or redundancy under a defined benefit pension scheme, you could inherit responsibility for those rights.
This is a complex area, but the message is that the company needs to take advice and do its pensions due diligence when making either share or business and asset acquisitions. Check what pension liabilities could arise and, once you know what they are, make sure they are factored into the price and dealt with in the purchase agreement.
9. Watch out for hidden nasties from defined benefit schemes – group risk
If a company in your group sponsors a final salary pension scheme, but does not have sufficient resources to support its pensions liabilities, then the Pensions Regulator could look to other group companies to support the scheme by issuing what is known as a 'Financial Support Direction'.
Recent case law suggests that there does not need to be any 'fault'. The Pensions Regulator can issue a Financial Support Direction even where the situation results from reasonable commercial activity.
The Pension Schemes Bill (which is expected to be law by the end of the year) will significantly increase the Pension Regulator's powers to pursue anyone whose activities are 'materially detrimental' to an employer's ability to fund its pension liabilities. This includes wide new powers to take criminal or civil action against individuals such as directors and advisers.
Make sure you know where pension liabilities sit in the corporate group, understand how they are funded and resourced and think through the consequences of any proposed transactions, both internal (such as re-organisations and re-capitalisations), and external (such as M&A activity).
10. Speak to our pensions team
We have a lot of experience in all of these areas and would be happy to help you.
Our pensions trustee company, Open Trustees, is also available to wind up small DC and old executive plans for you.
If you would like to hear more, please watch our video">, recorded for Osborne Clarke's In-House Lawyer 2020 event.
Please also contact us if you would like to discuss these tips, or any other question relating to your pension or death benefit schemes.