The Pensions Regulator’s COVID-19 guidance – regulatory easements

The Pensions Regulator has published helpful guidance in light of the COVID-19 pandemic. This guidance outlines various actions that trustees and employers can take in respect of their pension schemes to help manage the considerable challenges arising from the coronavirus outbreak. We have summarised below the key points relating to the easements which employers are able to request.

Suspension or reduction of deficit repair contributions (DRCs)

DRCs are lump sum cash injections paid by an employer of an underfunded defined benefit scheme in order to eliminate the deficit in funding over time. Their frequency varies significantly although they are often payable quarterly, six-monthly or annually.

The Regulator has recognised that it is likely to be helpful to many employers at the present time if a DRC payment(s) could be suspended or reduced to allow that cash to be used by the business to ease cash flow difficulties. As a result, the Regulator has provided advice to employers and trustees:

• Trustees should be open to employer requests to reduce or suspend DRCs where circumstances allow. Trustees should be provided with sufficient information to make a fully informed decision, if such information is not available, trustees should suspend or reduce DRCs for as limited a period as possible and for no more than three months
• It is expected that banks and other funders should be supportive of the business before DRCs can be waived with no dividends or other distributions being made from the employer
• Trustees may agree to a longer DRC suspension or reduction period, but this should be fully considered in line with the Regulator’s guidance, i.e. with appropriate information on the business case for the additional reduction or suspension, and should ideally be underwritten by protections such as a trigger for DRCs to resume if the business picks up earlier than expected
• Legal and actuarial advice should be obtained not only on whether a suspension or reduction of DRCs is appropriate, but also on the most appropriate method of implementation to avoid unintended consequences such as missed payments accidentally triggering scheme wind-up
• The suspension or reduction of DRCs should be carefully recorded to ensure all parties are clear on the terms
• The Regulator cannot waive trustees’ statutory obligations but will not take regulatory action in respect of late reporting or a failure to make contributions during the next three months

Suspension or reduction of future contributions

Where a defined benefit pension scheme is open to accrual for active members, contributions will be payable by the employer in respect of that future accrual. The Regulator considers that the considerations set out above for DRCs will apply if an employer wishes to suspend or reduce these future service contributions. In addition, the employer and trustees should also seek advice as to whether the rules of the scheme need to be amended to facilitate any suspension or reduction.

Release of security

The funding of some defined benefit pension schemes is underpinned by a security or guarantee which can be called upon by the trustees in the event of the employer becoming unable to support the scheme. The Regulator’s view is that trustees should be wary of agreeing to the release of such protections as it is likely to have significant legal and financial implications and could compromise the security of members’ benefits if the employer fails to recover from the impact of COVID-19. Specialist legal and actuarial advice is recommended, along with careful consideration of the specific facts and implications for the employer and the pension scheme.

Reduction in employer contributions to the statutory minimum

Automatic enrolment legislation requires employers to pay pension contributions at least equal to a specified minimum. Often, however, employers contribute in excess of the minimum and for such employers who pay into a defined contribution (also known as money purchase) pension scheme, the Regulator recognises that they may wish to reduce the pension contributions to the minimum amount for a period of time. Before reducing pension contributions, an employer should consider the following:

• Ensure pension contributions are not reduced below the automatic enrolment minimum requirements
• Whether any changes to staff employment contracts are needed and how any agreement with the employee needs to be obtained. Employers may wish to seek legal advice on the process
• Any agreements in place with recognised trade unions or other staff representative forums to discuss or notify of such changes
• Whether the rules or governing documentation of the pension scheme permits a reduction in employer contributions or whether a rule change will be required. If the pension scheme is a Group Personal Pension, the contract may not permit a reduction so the employer and employee may need to enter into new contracts with the provider
• If the pension scheme is a trust-based scheme, assess who has the power under the rules to make changes. This might be the employer or the trustees or be a shared power. If it is a trustee or shared power, the employer will need to engage with the trustees. Even if it is an employer power, it is recommended that the employer notifies the trustees before exercising it.

Ordinarily, employers of at least 50 employees are legally required to consult with members for at least 60 days if they are making a change that decreases employer contributions in a defined contribution scheme. However, the Regulator has advised that it will not take regulatory action in respect of a failure to consult for the full 60 days if all of the following apply:

• The employer has furloughed staff and is making a claim under the Coronavirus Job Retention Scheme
• The employer is only proposing to reduce the employer pension contribution in respect of furloughed staff
• The reduced contribution rate will only apply during the furlough period, after which time it will revert to the normal rate
• The employer has written to the affected staff and their representatives to describe the intended change and its effects

The Regulator’s decision to take a more relaxed and pragmatic regulatory approach in the coming months is welcome given the significant difficulties that employers and pension schemes are facing at the present time. The regulatory easements outlined above will apply until 30 June 2020, but the Regulator has confirmed that it will review this date as matters progress.

If you have any questions on any of the above, please contact one of the authors.

For further updates and other articles discussing the impact of the coronavirus please view our coronavirus hub.