COVID-19 has caused a wide range of issues for everyone in the pensions industry from scheme members to trustees, employers and their advisers.
The period has been marked by a downturn in the financial markets followed by uncertainty and volatility. This directly impacts the pension savings of DC members and has implications for the employer covenant and funding of DB pension schemes.
In response, the Regulator issued wide ranging guidance to help the pensions industry in which it identified several key areas where activities should be focused:
Benefits need to be paid
The risk of scams needs to be minimised
Employers need to keep contributing
Savers need support to make good decisions
Some breaches of the law may occur, but the Regulator is willing to maintain a proportionate and fair approach to any action they may take.
The guidance covers topics including the Government’s Coronavirus Job Retention Scheme (JRS) and scheme funding issues. Here we provide a summary of the publications as they apply to different stakeholders in the industry.
For further detail we would strongly recommend visiting the Regulator’s website for the full guidance as there have been updates and amendments made throughout the period.
Employers
The Regulator has aimed two pieces of guidance toward employers in relating to automatic enrolment (AE) duties DC pension contributions, and funding of Defined Benefit (DB) schemes.
The Regulator reminds employers that AE duties continue to apply as normal, irrespective of whether employees are still working or have been furloughed.
The JRS covers minimum employer pension contributions in addition to paying 80% of an employee’s salary (subject to a cap) but employers may need to pay a proportion of the pension contribution for furloughed employees if they contribute more than the statutory minimum.
Contribution rates can be reduced to the statutory minimum, but a consultation is almost always needed, and these requirements remain unchanged.
There is an expectation that employers with DB schemes will be open with their trustees and that information required to assess the impact on the employer covenant will be provided.
Trustees
Trustees of pension schemes have a difficult task to act in the best interests of their members, while ensuring the long-term sustainability of the scheme. The Regulator has provided several resources to guide trustees through communicating with scheme members, maintaining scheme administration and coping with any funding issues that arise.
Similar to the guidance issued for employers, trustees of DB schemes are asked to communicate with the employer and identify any risks to scheme funding and the employer covenant. In the guidance updated on 16 June the Regulator notes that whilst Deficit Repair Contribution (DRC) “suspensions or reductions may continue to remain appropriate...in view of the improved visibility of employers’ financial situations, we do not expect trustees to unquestioningly extend their original suspension arrangements on a three-month rolling basis based on limited information and for this to become the new normal”.
As a result, trustees will need to undertake the relevant due diligence before agreeing to a new suspension or reduction. As ever, legal and investment advice should always be sought when making decisions on scheme funding.
Trustees are also being advised to review their cashflow requirements to ensure that the scheme continues to function with as little disruption to core services as possible.
On DC scheme management and investment, the Regulator asks trustees to consider how members may react and to review and manage specific risks that may have arisen within their investment portfolios. Where the employer proposes a reduction in contribution rates the bests interests of the members must be considered first.
The Regulator acknowledges that while the disruption is likely to affect non-critical services, it is important to keep delivering on key processes such as payments, retirements, and bereavements.
As part of these critical services, effective communication with members is vital to help them make good decisions, and to keep them informed of any disruption to normal services. Highlighting of the increased risks of pension scams is also one of the key features of this guidance.
Member communications
Guidance for scheme members has been issued by the Regulator in conjunction with the Money and Pensions Service (MaPS) and the Financial Conduct Authority. They are urging savers not to make rash decisions and give a warning that scammers will look to take advantage of this situation. The clear and consistent message from all of the regulators, and the message trustees are also asked to give members, is don’t panic and if in doubt seek financial advice.
The Regulator is looking for trustees to make members aware of the benefits they could be losing if they decide to cease their contributions and/or leave the pension scheme. The guidance also states that schemes may wish to contact members who have left the scheme and remind them of their rights to either opt-in or re-join the pension scheme.
In addition, the Regulator has expressed a desire for DC schemes to communicate with members to help them better understand how current economic conditions are affecting their pension pot and the need to think carefully before making any decisions. It is recommended that this message is conveyed in benefit statements where they are to be issued over the next few months.
There has been some recognition that “the impact of COVID-19 means schemes need additional time to issue these to members” and therefore the Regulator will be taking a pragmatic approach where they are issued late.
Administrators and scheme providers
Guidance has been targeted towards administrators and scheme providers specifically to clarify what the Regulator expects from them during this time. The breach reporting duties were relaxed until 30 June and it has since been confirmed that reporting should resume from 1 July.
Before 1 July, breaches of the law that are rectified in less than three months and have no negative impact for members did not need to be reported but a record of any decisions should have been kept. The Regulator has confirmed that it will maintain a pragmatic approach to enforcement where breaches are COVID-19 related now that full reporting has resumed.
However, the automatic reporting of late contribution payments will continue to apply after 150 days instead of the usual period of 90 days. This extension will be reviewed again at the end of September 2020.
These measures are to ease the burden on already stressed schemes and allow for the fact that there will inevitably have been a reduction in service whilst working restrictions are in place.
Transfers
Between April and the end of June trustees of DB schemes were allowed to delay issuing transfer values by up to three months. This blanket easement has now to come to an end, but the Regulator acknowledges that problems may still exist for trustees of DB schemes especially where:
The guidance notes that if COVID-19 presents issues for producing CETVs, trustees may consider taking advantage of the existing flexibility in the legislation which provides for an extension of up to three months to issue quotations where the delay is deemed to be for reasons outside their control. Trustees should get advice before taking a decision to delay.
Our Comment
The Regulator’s extensive guidance provides some helpful advice to all parties in the industry, along with some easements to help employers and trustees maintain the sustainability of their pension schemes.
The key objective should be to protect pension benefits, and while the Regulator acknowledges the extremely challenging circumstances will affect everyone, the continued support of the regulators is vital to the safeguarding of scheme members.