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Sorting Out Company Pensions - The Time Is Now

Sorting Out Company Pensions - The Time Is Now

Times are changing in the oil & gas sector, and the world of pensions is not standing still either.
Given the fall in oil price, employers will inevitably want to (and need to) explore cost cutting measures.  Although it can be hard to get away from pension obligations, there are steps that employers can take to reduce their pension costs, and we are seeing a number of trends in this area.

This raises both pensions and employment law issues.  Our specialist employment and pensions lawyers can guide you through the maze.

Harmonisation of benefits - We are seeing more employers seeking to harmonise pension benefits, particularly where they have groups of employees on different benefit packages. Employers do need to ensure that the correct employment and pensions procedures are complied with, but the end result can be a benefit offering that is much easier to manage.  Similarly, employers with a number of different pension schemes (for example legacy final salary schemes perhaps inherited through corporate acquisitions) are reviewing these schemes with the aim of merging, or rationalisation, to cut down on costs and administration.

Offering New DC Flexibilities - The 2014 Budget was considered to be a real game-changer for pensions. The new flexibilities that allow employees to take their pension pots as cash are likely to lead to increased transfers from defined benefit to defined contribution schemes, and the introduction of an array of new products to facilitate this.  The flexibilities may be more attractive to employees whose pay increases have been cut back, or have recently been made redundant.  For others, a guaranteed income in retirement will be more of a priority and the current status quo of buying an annuity on retirement may continue.  Some employees who had intended to retire may change their minds, given the current uncertainty in the oil & gas sector – will more employees work longer? Or will they request phased retirement?  Employers should have in place strategies to manage such situations, and assess the costs (and benefits) of employees working longer if they are unable to afford to retire.

Preparing for Auto-enrolment - the costs of auto-enrolment (in terms of company contributions, management and administrative time) have to be met. Many employers will already have a pension scheme in place and be paying generous contributions that exceed the Government’s minimum requirements. But for smaller employers who do not already have a pension scheme in place, the cost impact is likely to be more acute.  Factoring in enough time before their staging date to deal with this can save administrative time and ensure that the pension product provided is suitable for their workforce.

Implementing a Flight Path - employers with final salary schemes (legacy or open) are now, more than ever, looking at how the costs of these schemes can be reduced and their liabilities managed. There are a number of steps employers can take to achieve these goals in this regard (if they have the trustees on board, and comply with the rules of the scheme).   We have seen an increased focus on reviewing scheme investments, and putting in place ‘flight paths’, which set out the route to get the scheme to a position where all liabilities can be transferred from the employer to an insurance company and protect the scheme against market volatility.

Controlling the PPF Levy – some employers have seen a marked increase in their PPF levy given the recent changes in the way the levy is calculated.  Employers need to ensure that the data and company information used by the PPF to calculate the levy is correct. If the data used is incorrect, the levy is likely to be higher than it should be, and this can be avoided easily. There are also various steps employers can take to reduce their PPF levy by ensuring the pension scheme liabilities sit at an appropriate place within the group.

Alternative Approaches to Funding - many employers of final salary schemes are facing their triennial scheme valuation.  This will involve negotiating with the trustees on what the company can afford to pay into the scheme.  This may well have changed given recent developments, and trustees will need to understand the covenant of the sponsoring employer and its ability to support the scheme in a worst case scenario.  Employers are seeking to limit their exposure to additional (increased) cash contributions, by considering alternative funding options (such as security or asset backed funding).

The impact on employers of the fall in oil price and increased operating costs will vary, but there is no better time for employers to review their pension arrangements to see if and where costs can be saved.

Caroline Strathdee