UK Pension Schemes in 2020

21 July 2020

As pension scheme professionals will know, UK pension schemes rarely have a quiet time, and 2020 has been no exception. The proposed new legislation in the Pension Schemes Bill 2020, the Corporate Insolvency and Governance Act 2020, the wider impact of Covid-19 and employers participating in the Local Government Pension Scheme, all highlight new issues to be faced by pension schemes, employers and trustees.

Pension Schemes Bill 2020

The Pensions Regulator’s powers

The Bill is progressing through Parliament and is due to become law later this year. It covers a number of areas of pensions law but perhaps most notably it introduces significantly greater powers for the Regulator to scrutinise employers and corporate activity in relation to defined benefit pension schemes that have a funding deficit. Funding deficits exist in nearly all UK defined benefit schemes and therefore the proposed new powers are likely to have a real impact on corporate activity: where an employer or a group of companies remains responsible for a defined benefit pension scheme and that pension scheme is underfunded, the Regulator will have power to “contribution notices” and in some cases issue criminal sanctions against employers (and persons connected or associated with employers) whose actions (or inactions) seek to avoid pension scheme debts or to reduce the company resources available to properly fund the pension scheme.  Good news for pension scheme members maybe, but there are already concerns from other corporate stakeholders that the Regulator’s new powers will slow corporate activity and stifle lending arrangements, re-financing and investment in companies that contain defined benefit pension schemes.

Climate change risk

The Bill also gives the government power to introduce regulations to require trustees and managers of pension scheme funds (some of the largest funds in the world) to consider climate change risk issues when deciding on pension fund investment principles and investment strategies – a clear move forward for climate change initiatives and the UK’s commitments under the Paris Climate Agreement.

Pension transfers for individuals

On the subject of individuals transferring their pension pots from one scheme to another, the Bill proposes to introduce further legal checks that must be carried out before a transfer can be made. Before an individual’s funds are transferred out of a pension scheme, evidence of residential status and address or evidence of new employment will be required. Whilst more stringent these measures are designed to protect individuals from pension scams.

Pensions dashboard

Pensions Dashboard would allow consumers with several pension pots to have a clear understanding of their accumulated pension wealth. This is likely to benefit increasing numbers of people in the future with the introduction of automatic enrolment. Consumers with a better understanding of their accumulated pension wealth should make better informed decisions when taking their benefits.”

Covid-19 update

Defined benefit schemes

The impact of Covid-19 on the economy and UK businesses has understandably affected pension scheme contributions across all types of pension scheme. In respect of funded pension schemes, the Regulator has issued extensive guidance for trustees and sponsoring employers who may need to re-visit and re-negotiate the employer’s deficit reduction contributions to the pension scheme where the employer is struggling financially. Parties must strike a careful balance between supporting the employer’s business recovery whilst agreeing a sustainable long term plan for reducing the pension scheme funding deficit; the Regulator urges pension trustees to request information on other company creditors and to ensure the pension scheme is treated on an equal footing wherever possible.

Defined contribution schemes and automatic enrolment

Most businesses in the UK now operate a defined contribution pension scheme, particularly for automatic enrolment purposes. The impact of Covid-19 and furlough arrangements have had a huge impact on the workplace and employers’ resources. Some employers may have agreed reduced employer contribution rates for furloughed employees, as a cost saving measure, but this was only possible where the employer was previously contributing above the statutory minimum rate and was seeking to reduce its contribution to the statutory minimum rate (3% of qualifying earnings). Employers who are in a position to bring back furloughed employees may need to review pension details, particularly where salary sacrifice arrangements are part of terms and conditions of employment.

Employers operating salary sacrifice arrangements due to not being permitted to make any deductions from the CJRS grant when paying furloughed employees.

Reporting pension scheme events

The governance and regulatory reporting regime for UK pension schemes is fairly onerous and extensive. Due to the impact of covid-19 the Regulator announced that it would be relaxing the usual pension scheme reporting and notification deadlines, to allow trustees and employers to focus on more pressing issues. However from 1 July the Regulator expects pension scheme reporting and notification deadlines to be met, for example in relation to audited accounts, annual governance statements, statements of investment principles, scheme annual returns, late valuations, late deficit recovery plans and any delayed member transfer payments.

Corporate Insolvency and Governance Act 2020

Businesses in financial difficulty have now been granted more rescue options: a new form of moratorium – where company directors remain in charge but with an independent Monitor to oversee events – offers businesses time to deal with creditors (including pension scheme creditors) and the potential to propose a restructuring plan outside of the normal rigorous administration and insolvency laws. The new provisions are generally welcome in the current economy however the existence of a defined benefit pension scheme within a business will make rescue options more complicated. Businesses must engage with the pension scheme trustees in relation to any new moratorium or restructuring proposals: the trustees (supported by the Pensions Regulator and the government’s Pension Protection Fund) will have rights to challenge the directors and the Monitor and to vote as creditors on any proposed restructuring. In addition, certain pension scheme liabilities must continue to be paid by the business even during a moratorium.

Local Government Pension Scheme

Many local government services are outsourced to private sector contractors. Where staff transfer, staff local government pension benefits are protected. The government recently consulted on whether all contractors should be required to become employers (admitted bodies) in the Local Government Pension Scheme (currently, contractors have an alternative option which is to provide their own pension scheme for transferring staff subject to their own scheme being certified as providing a comparable pension benefit to the LGPS). If contractors are required to become LGPS employers (as many currently are) then this highlights the ongoing need to clearly address contractors’ LGPS funding risk exposure. Contractors often operate a contract for a fixed term and do not always budget for additional LGPS funding costs that can arise, for example redundancy or ill health pension costs, increases in employer contribution rates or significant ‘exit deficits’ on withdrawing from the LGPS where the overall fund is in deficit. These funding liabilities can be significant for contractors and it is worth negotiating protections in the main outsourcing contract.

Ginevra Gattrell | 360 Business Law

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