COVID-19: what regulatory action are governments taking on pensions in the UK and beyond?
The UK Government and the Pensions Regulator have been very active over the past few months, introducing financial assistance, regulatory flexibilities and guidance aimed at helping employers and pension schemes to deal with the impact of COVID-19. This article provides details, followed by a comparison with other jurisdictions.
Delaying or reducing pension scheme contributions
To try and help employers to ease cash flow problems caused by the pandemic, a more flexible approach towards their obligations to pay into pension schemes is being taken.
For employers with defined benefit (‘DB’) schemes, the Pensions Regulator (‘TPR’) has been sympathetic to requests for suspension or reduction of contributions required to fund those schemes. It released guidance saying that, subject to certain principles, pension scheme trustees should be ‘open to’ such requests. Trustees could allow short-term delays or reductions to help with immediate liquidity constraints, despite having limited information or time to assess the request.
The tone of TPR’s guidance has changed recently reflecting that, following the initial uncertainty at the outset of the crisis, trustees should now have better visibility of an employer’s financial situation. Despite its continuing flexibility, TPR now emphasises the need for trustees to do due diligence, keep a close eye on the employer’s ability to support the scheme, and put suitable protections in place. TPR is also very clear that pension schemes should be treated fairly with other stakeholders. In particular, employers seeking a break from contributions should expect payments to shareholders to stop.
TPR initially allowed a three-month window in which it would not use its regulatory powers in respect of either reporting late payment or failure to make contributions to DB schemes. This expired on 30 June, although TPR will continue to ‘respond pragmatically’ where breaches are COVID-19 related.
There is less flexibility when it comes to suspending or delaying contributions where employers have a defined contribution (‘DC’) scheme. Unlike a DB scheme, the contributions to a DC scheme are allocated directly to the individual employee’s pension savings pot, so any delay would have an impact on those savings. Also, under the UK’s automatic enrolment legislation, both minimum employer and overall pension contributions are required to be paid to a DC scheme. This requirement has not changed during the pandemic. (Whilst this legislation also applies to employers with DB schemes, the focus is on minimum benefits being provided rather than the level of contributions.)
However, for employers paying higher DC contributions than the minimum level required under legislation, TPR has made it easier to reduce contributions down to that level. Where an employer with at least 50 employees is contemplating a reduction in its DC contributions, a 60-day consultation would generally need to be held. TPR has temporarily waived this requirement, subject to certain conditions being met, although it still expects as much consultation as possible to take place. In a further relaxation, trustees and providers now have 150 days to report late payments of DC contributions (normally, this needs to be done within 90 days).
Both of the above easements will remain in place until at least 30 September 2020.
The UK Government included a grant for pension contributions in its Coronavirus Job Retention Scheme (also known as ‘furlough’). Under this scheme, the Government agreed to pay a portion of wages in respect of employees who temporarily stopped working for their employer as a result of the pandemic, without being made redundant.
The pension contribution part of the grant, which was calculated by reference to minimum automatic enrolment contributions, ceased to apply at the end of July. As things stand, the Government is also reducing the amount of grant available each month, with the scheme currently scheduled to close altogether at the end of October.
Other regulatory easements and guidance
TPR granted a number of other easements to help with administering pension schemes during the turbulence of the early stages of the pandemic. These included promises not to take regulatory action if schemes suspended pension transfers or didn’t meet deadlines for scheme valuations. Most of these easements ended on 30 June 2020.
Both TPR and the Government have released a raft of guidance for employers and schemes on dealing with the crisis, which is being regularly updated in response to developments.