Pensions - what can employers do to free up cash during the COVID-19 pandemic?
Previously we discussed what trustees of pension schemes should be doing during the coronavirus crisis, but what should sponsoring and participating employers be doing?
Cash flow problems are likely to be a common theme for employers in the coming weeks and months.
Defined benefit schemes
Those with defined benefit (“DB”) pension schemes may be looking to defer payment of deficit repair contributions and / or suspend (or reduce) payments for current and future service in order to retain money in the business. The Pensions Regulator (the “Regulator”) has published DB funding guidance for employers in relation to such requests.
In summary, the Regulator states that:
- any requests must be justifiable
- a plan must be put in place for payments to be brought up to date within the current recovery plan time frame
- where possible, measures should be implemented to mitigate against any detriment caused to the scheme
- the scheme should be treated fairly when compared to other stakeholders.
In addition, the Regulator has published separate funding and investment guidance for DB trustees on how to respond to requests from scheme employers for the deferral of payments. Employers who are considering making such requests should familiarise themselves with the short guidance to have the best chance of obtaining the agreement of the trustees.
Where an employer is facing liquidity constraints and makes a request for an immediate reduction or suspension of payments giving trustees only limited information, the Regulator suggests that trustees should agree to defer payments for a period of no more than three months. However, trustees may agree to a longer deferral if the employer provides full information on an ongoing basis, and has commitments from other creditors to support the business.
The Regulator expects trustees to ask about the current demand for the employer’s products, cash flow forecasts (employers are expected to prepare 13 week forecasts where cash flow is expected to be an issue), and whether the employer is discussing further borrowing facilities. Employers should also anticipate that trustees will require the business to agree not to pay dividends until any outstanding contributions have been paid in full.
The Regulator has also advised that employers and trustees take legal and actuarial advice as to the most appropriate method of suspending deficit repair or future service contributions so as to ensure they do not inadvertently trigger a scheme wind-up. Lastly, the Regulator has given DB scheme trustees a reprieve in relation to actuarial valuation / recovery plan submissions, which is likely to come as a relief to many employers – while the statutory 15 month deadline for submission remains, the Regulator has stated it will not take action against trustees for up to three months if they decide to delay. The Regulator has also stated that it does not generally expect trustees to revisit valuation assumptions that have been set under different conditions than those currently prevailing but (helpfully) acknowledges that post-valuation experience will be relevant when agreeing recovery plans as the affordability of contributions may be constrained.
The drop in financial markets will also impact DB scheme investments and funding levels and the Regulator expects employers to engage with the trustees in relation to scheme funding and any potential investment changes, noting that while a significant number of employers will be financially impacted by coronavirus, the market drop may bring opportunities for pension schemes (for example improvements in insurance pricing).
Defined contribution schemes / Auto enrolment
Employers with defined contribution (“DC”) pension schemes will be equally concerned about cash flows. As things stand, employers are still required to comply with their automatic enrolment obligations, although the Regulator has announced some regulatory easements and clarified that statutory auto enrolment contributions will be covered by the Government’s Coronavirus Job Retention Scheme (“JRS”).
Legislation will be required to permit employers to reduce or pause auto enrolment contributions, so unless and until this is passed, contributions should continue at the minimum levels (3% employer contribution and 8% total contribution).
In relation to the JRS, the Government has confirmed that employers will be required to continue auto enrolment contributions in respect of any employees who are furloughed under the JRS. Employers will be able to reclaim the minimum auto enrolment contributions on the subsidised wage from the JRS (ie. 3% of the lower of 80% of an employee’s regular wage or £2,500 per month, in excess of the usual lower earnings limit).
If an employer chooses to top-up salaries to 100%, the JRS will not fund auto enrolment contributions on the top-up amount, nor will the JRS fund any contributions above the auto enrolment minimum; employers who currently contribute more than the minimum, and wish to continue paying those contributions, will have to fund this themselves. More guidance on how employers should calculate their auto enrolment contributions will be provided by the Government before the JRS becomes live.
Employers who are currently contributing more than the statutory minimum may be able to reduce their contributions, but should contact their legal advisers before doing so to ensure that is permitted under the terms of their employment contracts and / or pension scheme rules.
In relation to DC schemes, members are most likely to be concerned about the falls in the stock markets and therefore in their retirement pots. Indeed some funds are suspending trading to protect their assets. Employers may see an increase in pension enquires from concerned employees, and should direct any such questions to the pension provider or the trustees as applicable.
The Regulator has also announced that it is temporarily limiting some enforcement activity. The Regulator will treat employers who have breached their obligations, but have a reasonable explanation, sympathetically. To that end, the Regulator has written to pension schemes informing them of a change to reporting requirements in relation to late payment of contributions; trustees and providers will be required to report late payments when they are 150 days overdue (as opposed to the usual 90 day deadline). The Regulator has emphasised that while employers are still required to make the contributions, trustees and providers should be as flexible as possible and accept payments over a longer period if necessary.
It is a challenging time for employers, but there are options out there for those who are struggling to meet their pension obligations and whose main focus is to preserve cash in the business. An open dialogue between all those involved will ensure issues are resolved swiftly and fairly.
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