COVID-19: Pensions regulator guidance for employers – consultation and furlough

22 April 2020

The Pensions Regulator (the Regulator) provided new and welcome guidance on both 9 and 17 April for employers, trustees and providers in relation to the challenging current circumstances, and in particular the pensions aspects of the Coronavirus Job Retention Scheme (CJRS). This Insight focuses on the approach to employers' consultation with their workforce in this period.

Employers will particularly welcome the guidance on the Regulator's temporary relaxation on enforcing the legal requirement to consult where contributions are reduced to the statutory minimum for furloughed employees.



Her Majesty's Revenue and Customs (HMRC) has also issued updated guidance on salary sacrifice which we will cover in our next Insight.

Key action points

There is a new temporary easement for employers reducing DC contributions to the auto-enrolment statutory minimum for furloughed workers, as the Regulator has said that until 30 June 2020 it will not enforce the normal obligation to consult with employees for the minimum period of 60 days. The position will be reviewed further then, as matters progress.

Background to the changes

Since it was announced on 19 March 2020, the pensions industry has been grappling with the practicalities of the CJRS. Employers will be able to claim employer pension contributions up to the automatic enrolment statutory minimum (based on 3% of qualifying earnings) through the CJRS, but in many cases, this amount will be less than the employer pays through its current pension arrangements. It is also a "one size fits all" process so does not distinguish for different types of benefits. Employers are therefore faced with two choices: they can make up the "shortfall" in pension contributions at their own expense, or they can propose changes to their existing pension arrangements. One of the difficulties with proposing changes to pension arrangements is that it can trigger a statutory requirement for 60 days' consultation with affected employees and their representatives (and a potential 30/45 day consultation if contractual changes are proposed depending on the number of employees involved).

Reducing DC contributions, furlough and consultation

Employers' automatic enrolment (AE) duties continue to apply as normal, including re-enrolment and re-declaration duties, regardless of whether staff are still working or furloughed as part of the CJRS. Furlough does not entail a change to employment status, so employers must also continue to make the contributions set out in their pension scheme's rules or other governing documentation.

However, the amount which employers can claim from the CJRS is based on the statutory minimum requirements for automatic enrolment purposes - 3% of qualifying earnings. In many cases, however, employers may calculate their pension contributions on a different basis (perhaps because they chose to certify from the first penny of earnings, for example).

Staff who are furloughed may want to either reduce contribution levels (if scheme rules allow) or opt out and cease active membership. Employers must not encourage or induce them to do so however.

Employers may also wish or need to consider changing their contributions. For Defined Contribution (DC) schemes, employers paying more than the statutory minimum of 3% of qualifying earnings may be able to decrease employer contribution rates to the statutory minimum, subject to the usual considerations and constraints of employment contracts, agreements with trade unions and staff forums, scheme rules and pensions and employment legislation. These will need careful consideration and potentially new agreements to vary existing terms.

In one area, the Regulator has made helpful changes to its approach to enforcement and provided a temporary easement for employers reducing contributions to the statutory minimum. The Regulator has said that the normal obligation, where employers have at least 50 employees, to consult for at least 60 days will not be enforced by the Regulator until 30 June 2020 and possibly longer. The following conditions apply:

  • the relaxation is only in relation to furloughed employees, not anyone else (for example, employees who are on reduced hours or if the employer wished to reduce its pension contributions to the automatic enrolment minimum levels for all of its workforce);
  • the employer must also write to affected staff and their representatives to describe the change and the effects on them and the scheme;
  • the reduction must only apply to the furlough period (and reverts to the current rate at the end of the furlough period); and
  • the employer should still carry out as much consultation as possible (albeit there will be some practical issues to consider where staff are furloughed).

If these conditions cannot be met, the Regulator expects full consultation and so, presumably, would enforce as normal.

Note the relaxation in enforcement by the Regulator does not mean that the consultation obligation is removed as a matter of law, so any consequences of not complying with the legal obligation still apply, for example financial penalties up to £50,000 per employer.

Reducing DB benefits/increasing member contribution & consultation

Some employers may want or need to make pension changes which go beyond reducing employer contributions to the statutory minimum. This is a more complex position and the Regulator has not granted any easement or relaxation of the normal 60-day consultation obligations.

This means that employers will need to carefully consider the following aspects in addition to the usual considerations on a proposal to reduce future service benefits:

  1. Scheme Rules: in particular the definition of pensionable pay and the rules on admission, eligibility and amendment.
  2. Contractual position: review employment contracts and handbooks to establish the "pension promise".
  3. Monitor member category: furloughed members will remain active members as they are still employed, but not all scheme rules have flexibility to recognise the position clearly - the risk of triggering a section 75 debt in particular needs very careful management when there is so much change in the workforce, in particular where there are proposed redundancies. We cover this in our insight on worker status.

Conclusion

The overall approach to introducing pension scheme changes is broadly unchanged for both DB & DC arrangements, which means the usual minimum 60 day consultation for most employers. The easement announced by the Pensions Regulator is limited, but nonetheless welcome where it applies.

There is additional complexity for employers where they are dealing with a membership that has different working arrangements during this period for example: some working at 100% normal contract; some working at 80% normal contract; some on furlough leave. Each category will need to be considered carefully with potentially different consultation approaches applying. Employers will also need to factor in time for reaching agreement on any variation to contractual terms, including the furlough agreements which may involve trade unions or other consultative bodies.

Contractual variations agreed on a collective basis will also need to be discussed with the Trustees in terms of implementing the arrangements.

The pace of change is fast 

Updated Guidance from a variety of official sources is coming out regularly, as difficult elements of the process are addressed.  It is important to review the latest updates as they are issued. 


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