The high cost of employer pension contributions and the limited rebate available under the UK government’s furlough scheme mean that some employers are considering reducing their contributions or looking at other ways of limiting their pension costs. But there are dos and don’ts for employers thinking of reassessing their pension arrangements in light of the pandemic and emergency response.
1. Know your scheme
For occupational (trust-based) schemes, the scheme rules and trustees will determine what flexibility is possible within the scope of the existing rules and how any changes to those rules must be introduced. For personal pension schemes, contractual changes may need to be agreed with the staff and provider concerned.
2. Comply with your automatic enrolment duties
Employers must ensure that they continue to comply with their automatic enrolment duties, in particular that contributions or benefits do not fall below the minimum needed to ensure the scheme continues to satisfy one of the tests to remain a qualifying workplace pension. This means that contributions cannot be reduced to below the statutory minimum of 3% of qualifying earnings.
3. Consult with staff
The Pensions Regulator (TPR) has issued technical guidance for employers who wish to consider reducing their contributions to match the rebate received from the furlough scheme. The only easement offered by TPR is to overlook (until 30 June 2020) a breach of the statutory 60-day consultation requirements applicable to employers with more than 50 employees.
This easement only applies to employers who propose to temporarily reduce employer pension contributions to defined contribution schemes for furloughed staff (not all staff). To reduce them to the statutory minimum, changes would typically be needed to the pensionable salary figure, the percentage payable and to automatic enrolment certification. The employer must nevertheless write to affected staff to explain the impact and consult them as much as possible.
For other employees, the normal statutory consultation rules apply. Proposals to change the employer’s pension contributions (for example from 10% to 5%), reduce the stated rate of benefit accrual, or change the definition of pensionable salary (to exclude certain types of pay) would all be “listed changes” requiring consultation for a minimum of 60 days.
The only exception to this is where the proposed change has no lasting effect on the benefits that may be provided under the scheme. This is likely to have limited application, for example, where an employer suspends its contributions in respect of employees accruing defined benefits, but those benefits remain unchanged, or where contributions are in effect only delayed for a short period.
In other cases, the Pensions Regulator has power to waive or relax the consultation requirements: “if it is satisfied that it is necessary to do so in order to protect the interests of the generality of the members of the scheme.” It seems likely that it would be prepared to do so if swift action was necessary to protect the employer’s business.
Consultation is the employees’ opportunity to give their feedback and propose alternatives before changes are made. Employees and their representatives (where applicable) must be given sufficient information in writing for them to understand the reasons for and the effects of the proposals and to feedback on them. Feedback may include suggesting other options, for example voluntary reductions only or proposals to make up shortfalls later.
4. Make valid amendments
For occupational pension schemes, any changes needed to the scheme’s contribution or benefit rules must be made under the scheme’s amendment power, generally requiring formal documentation and the agreement of the trustees.
The trustees will test the employer’s reasons for the change to ensure the change is justifiable and in the best interests of members. Time limited changes are likely to be easier to justify and the Pensions Regulator recommends that they are considered. Retrospective amendments can be problematic and potentially invalid, so the formal amendment should precede payroll changes, requiring planning.
For group personal pensions (GPPs), contributions or salary sacrifice arrangements incorporated in contracts of employment will need to be varied with employee agreement, unless the contract already gives the employer power to change and reduce them unilaterally. The employer’s agreement with the pension provider will also need to be updated.
Where employee agreement is needed it should come first. Pay cannot be sacrificed if it is already payable for tax purposes and employers cannot safely rely on a lack of employee objection to a reduction in employer contributions because the effects of the change are not readily felt.
Employees must give their express agreement to the changes sought. To be enforceable, the change must be clear, consent must be genuine (not a mere acknowledgement of a fait accompli) and the benefits to the employee should be referred to (job preservation, a reduction in employee contributions).
5. Take legal advice
This will help you understand what options you have under an occupational pension scheme, how you should go about making changes to GPP arrangements and what your duties are.
1. Don’t incentivise employees to opt out of the pension
This would be breach the automatic enrolment rules and could result in enforcement action.
2. Don’t ignore the impact on death benefits
Will reductions in pay impact on the death in service benefits payable? Can these continue to be based on full pay? Will they cover those absent from work? What benefit do you want to provide and how does this sit with the rules of the relevant scheme and cover provided by the underlying assurance policy? Does the assurance policy contain any provisions which could limit cover in the context of the Covid-19 pandemic?
3. Don’t permit unintended consequences
Ensure that the scheme rules of occupational schemes do not operate unexpectedly. For example, if the employer suspends contributions in respect of its active members, do the trustees have powers to reduce benefits or terminate the scheme?