By Dr Ros Altman
The Government has been acting in record time on many fronts, trying to do ‘whatever it takes’ to protect people’s jobs and businesses during this unprecedented disruption to our way of life and economic activity. A range of measures has been introduced, which balance the needs of businesses and individuals in the short-term, with the aims of pension provision over the long-term.
Auto-enrolment contributions are being protected for furloughed workers in the Coronavirus Job Retention Scheme: The decision to ensure workers’ auto-enrolment pension contributions are not lost when they are temporarily unable to work due to Covid-19, is hugely welcome. It had been feared – and was called for by some commentators – that the Government would decide to suspend auto-enrolment pension contributions in response to the labour market turmoil. However, Ministers have decided that the Coronavirus Job Retention scheme will not only replace 80% of workers’ wages up to £2500 a month, but the temporary scheme, running from March 1st for at least three months, will allow employers to reclaim from the Treasury the minimum auto-enrolment pension contributions for each worker in addition to the employer National Insurance payments.
Reasonable compromise to protect the success of auto-enrolment but also protect taxpayers: The auto-enrolment protection will not reimburse employers who are making pension contributions above the legally required minimum. The law only requires employers to contribute 3% of so-called ‘band earnings’, which is the workers’ pay between £6,240 and £50,000 a year. The maximum amount of pension contribution the Government will pay will be £59.40 a month, for someone who receives the maximum £2500 per month. The Government has had to make a difficult decision, between protecting pension contributions in full, which could cost far more than the minimum, and controlling costs to the public purse.
Those currently paying more than auto-enrolment minimum will not be reimbursed for the additional sums but employers and workers can consult on cutting to the minimum: If employers are currently paying much greater contributions (some pay more than the 3% minimum, others pay contributions on the entire salary, rather than only the amount earned above the equivalent of £6240 a year). then the extra amount will not be reimbursed by the Coronavirus Job Retention Scheme payments. If the employer still wishes to reduce contributions, it would need to consult with the workforce and agree new arrangements. Of course, workers can still decide to save money by opting out of auto-enrolment, but this would mean they would then lose the employer pension contributions too. The behavioural success of the auto-enrolment project has shown that most people are willing to make pension contributions on a regular basis, if they do not have to actively decide or arrange to do this themselves. By abandoning auto-enrolment, even just through the crisis, the impacts on long-term pension provision could be severe.
The Pensions Regulator has also announced further emergency measures to help pension schemes through the current economic and market turmoil.
DB transfers put on hold for three months: In an unprecedented move, the Pensions Regulator has announced that pension scheme trustees can halt transfers out of Defined Benefit pension schemes for the next three months. As asset prices have fallen significantly, many illiquid assets are not trading readily in the current crisis and pension scheme valuations are likely to be unreliable while the present disruption prevails. There have been concerns that people transferring money out of their Defined Benefit pension schemes at the moment could be damaging either the scheme’s or their own future. This sensible and pragmatic decision will help to protect scheme members who are at heightened risk of scammers while more people are at home or not working, and while the markets are in turmoil. Given the market volatility and violent asset price movements, nobody can be sure of the accurate value for scheme assets or liabilities. Therefore, the calculation of Cash Equivalent Transfer Values is likely to be unreliable and the problems being experienced in pensions administration while such volatility persists will be magnified by transfer requests. As long as scheme rules allow, the trustees can suspend transfers in the interests of all members.
Trustees can agree to allow employers to halt Deficit Repair Contributions for three months: As businesses are struggling to survive during the interruptions caused by the Covid-19 lockdowns and business suspensions for many sectors, the Pensions Regulator has sensibly decided to allow employers some relief, if needed, in ongoing Deficit Repair contributions for their pension scheme shortfalls. Trustees will need to agree this with the employer, but if they judge that the business emergency means employers would be unable to afford these additional contributions (ongoing contributions for open schemes should not be suspended) then the Regulator permits the trustees to suspend collection of deficit contributions for the next three months. This is another pragmatic decision, allowing some breathing space for employers to deal with their business finances. It is clear that the suspension of deficit contributions must also be accompanied by other measures from the employer, including not paying dividends to shareholders. It would be unacceptable for firms to pay money to shareholders while withholding it from the pension scheme.
Cash-Flow implications need to be managed: Another benefit for the scheme of being allowed to suspend transfers is that it will permit easier cash-flow management. If the employer deficit contributions are not being paid for a time, pension trustees will still need to pay out the pensions as they fall due and also meet any cash calls for hedging and margin requirements. This is obviously an issue that the trustees will be mindful of when agreeing measures with the employer, but most schemes should be able to sell or pledge assets such as gilts, to cover their short-term needs. Having too much of their assets in highly illiquid holdings would be damaging for a very mature scheme, but most schemes would have been advised to hold some readily realisable assets to cover cash-flow requirements.
10% Pension Scheme levy increase put on hold: The Government has also decided not to introduce the planned 10% rise in the pension scheme levy that was due to come into effect on 1st April. This will be a further relief for hard-pressed schemes currently coping with the coronavirus fallout.
Rapid actions will help stabilise the system during this emergency: This package of emergency measures is designed to help pension schemes survive through the crisis, while also helping to protect members’ pensions for the longer term and offset the increased scam risks. Some employers and schemes will inevitably fail and we do not yet know how long this situation will last, but it is good to see pensions have not been overlooked in the ongoing turmoil.
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