Following the launch of the UK Government's Coronavirus Job Retention Scheme ("JRS") website earlier this week, we released a blog with guidance for employers that contribute to defined contribution pension schemes on behalf of their furloughed employees.
This blog focuses on employers that contribute to defined benefit ("DB") pension schemes.
Furlough and DB schemes
The JRS only covers statutory minimum automatic enrolment employer pension contributions. This effectively means that employers continuing to offer DB pension benefits through an open occupational DB scheme will either need to fund future service contributions themselves (if viable), or, agree an appropriate course of action with the scheme's trustees or managers.
A suspension of future service contributions using a scheme's temporary absence provisions may facilitate this but may necessitate alternative, short-term, pension provision during a period of furlough leave.
Employers should consider whether the steps they have taken give rise to an obligation to consult with affected employees and, if so, the extent to which they need to place reliance on a temporary easement issued by the Pensions Regulator ("TPR"), which we touched on in our previous blog.
Affordability concerns: regulatory easement
In the short, or indeed the long term, affordability may be an issue; something which employers and those managing such DB Schemes will need to consider. What steps can employers take?
Employers participating in open and closed schemes may seek to pause or reduce their deficit reduction contributions ("DRCs").
TPR has advised that it will take a pragmatic approach where unforeseen arrangements are sought (such as: DRC reductions or suspensions, or additional debt being secured over employer assets), and has indicated that it is receptive to such measures until 30 June 2020 (with the possibility of further extension), provided that:
- the need for it can be justified
- a plan is made for deferred scheme payments to be caught up (e.g. beyond the shorter term)
- a plan is agreed for mitigating any detriment caused to the scheme
- the scheme is being treated fairly compared with other stakeholders (in particular, payments to shareholders and other value-leaving the employer should have ceased)
Closure to future accrual
Some employers may wish to close to future accrual, effectively curtailing the requirement for future service contributions altogether. However, this is clearly a longer-term strategic change which would also involve the adoption of a different, more conservative, approach regarding scheme funding.
It would also be necessary to consider the scope of, and compliance with, obligations to consult when making certain changes affecting pension provision, which may make such an option less desirable. Some employers may have contractual obligations with a third party which require them to continue to provide DB pension benefits for employees that have transferred to them.
Consider any unintended consequences
Employers and trustees must consider whether the scope of any contingent security arrangements (i.e. parent company guarantees or contingent security over land) remain sufficient, and discuss any other corporate activity affecting the scheme sponsor as a result of COVID-19.
Specialist advice should be obtained prior to the implementation of the above measures. Not least, to avoid unintended consequences (such as an inadvertent triggering of a contingent employer "section 75" debt).
Record keeping and communication
TPR has strongly recommended that employers document their position regarding the treatment of their schemes, as this may assist in any future engagement with TPR. TPR has also emphasised the importance of employers communicating with their scheme trustees on an ongoing basis.
The importance cannot be overstated (for both employers and trustees) of good record keeping in relation to any decisions made.
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