Key considerations to undertake before altering pension contributions

For those employers who can weather the current storm, there are likely to be further challenges ahead in terms of whether and when there is a return to financial stability. 

We are regularly being asked whether employers are able to maintain contributions to their pension scheme at pre-COVID levels over both the short and longer term. Here are some insights:  

Deferring and altering contributions sounds easy – surely it’s straightforward?

Due employment contracts, layers of legal requirements and also guidance, it is best to tread with caution and make sure that various requirements are met.

Automatic enrolment and defined contribution schemes 

For automatic enrolment pension schemes, which will typically be defined contribution (DC), employers must continue to contribute as normal. However, they may be able to get a grant to cover the cost of pension contributions for those employees who are on furlough (via the government’s job retention scheme). 

For those employers who use an alternative arrangement, in most cases, the employer will be obliged under the terms of employee contracts and the rules of the pension scheme itself to maintain contributions at the particular level set out in the relevant pension arrangement. 

It’s possible that employees will themselves decide to pay reduced pension contributions or to opt out of the pension scheme, which will have an effect on the amount an employer is then required to contribute. Employers should be very careful that they do nothing which could be seen as encouraging or inducing members to take this course of action.

However, The Pensions Regulator’s (TPR) guidance recognises that if an employer uses a DC pension scheme and its contributions are more than the statutory minimum, which is required under automatic enrolment legislation, that employer may be able to decrease those contributions to the statutory minimum.

Employers cannot reduce contributions to below the statutory minimum levels. It may be difficult to achieve a reduction in contributions and there may need to be consultation with employees and trade unions. Any employer which believes that it may need to take this route should therefore start planning sooner rather than later.

Whether it will be possible to reduce contributions will depend on a number of factors, which are likely to include:

• the terms of employment contracts with affected staff
• any agreements the employer has with recognised trade unions or other staff representative forums
• the rules or governing documentation of the pension scheme
• who has the power under those rules to make changes – it may require agreement, which in turn requires negotiations
• whether there are other legal requirements which might apply to this type of change, including employer consultation requirements.

On this last point, TPR has indicated that it will relax the employer consultation requirements in some circumstances in respect of employees who are on furlough.

Defined benefit schemes

In defined benefit (DB) schemes, to make any kind of variation to employer contributions, employers need the co-operation of the pension scheme trustees. In practice:

• the employer will need to give the trustees the information that it can to support the trustees’ decision-making process;
• TPR emphasises that the trustees must have sufficient time to consider the request;
• employers need to be aware that trustees should, accordingly, be challenging unreasonable deadlines – but TPR is mindful that a decision might be needed very quickly. In those circumstances any deferral should be short, to enable a more considered decision to be made once full information is available.  

Trustees will need to give full consideration to the implications for members and the security of their benefits. This will involve analysis of the employer’s ongoing viability, the strength and enforceability of any contingent assets, and the funding levels of the particular scheme (including the PPF funding level). 

In many circumstances, it will be vital to obtain input from covenant advisers. Trustees should also look to confirm what other steps employers are taking to negotiate payment suspensions with other creditors or to access government funding. The aim is to ensure that the pension scheme is treated fairly with other stakeholders – that it isn’t seen as a ‘soft touch’.

Amending the schedule

If agreement is reached:

1. it is important that the scheme’s current schedule of contributions, and if appropriate the recovery plan, is properly amended
2. we would generally recommend that the schedule is amended – to not do so can give rise to potential legal issues as to the treatment of the debt that would otherwise fall due under the schedule.

The reduction should have an end date as well as triggers which will see contributions re-start once certain conditions are met. The employer will also want to keep an audit trail of its processes, in case it needs to evidence the steps taken in future. 

The author is Clive Pugh, partner, Burges Salmon.

This article is provided by Burges Salmon.