People: Key action checklists for trustees and employers of DC schemes (UK) – UPDATED

Current events related to Covid-19 and the related economic impact are raising a number of time critical pensions-related issues that employers with defined contribution (DC) schemes and trustees of such schemes need to address. To help with this, we have created checklists (based on our experience advising clients to date) which summarise the key pensions-related issues and regulatory guidance that employers and trustees need to consider in relation to DC schemes:

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Pressure points: Key actions checklists for trustees and sponsors of DB schemes (UK) – UPDATED

Current events related to Covid-19 and the related economic impact are raising a number of time critical issues that sponsors and trustees of defined benefit schemes need to address. To help with this, we have created checklists (based on our experience advising clients to date) which summarise the key pensions-related issues and regulatory guidance that trustees and sponsors need to consider in relation to defined benefit schemes:

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Trustees beware – Changes to UK insolvency regime are now in force

The Corporate Insolvency and Governance Act 2020, which contains the most far-reaching reforms to UK insolvency law in over 30 years, received Royal Assent and came into force at the end of last week.

The Act has been introduced on an emergency basis in an attempt to ensure that otherwise financially viable companies survive during a period of unprecedented interruption and turmoil. However, it undermines the protection afforded to defined benefit (DB) pension schemes and the Pension Protection Fund (PPF) where a corporate sponsor experiences financial distress. It could also upset the delicate balance between debtors and creditors under UK law.

The position of DB pension schemes (and the PPF) has been weakened through the introduction of:

  • a new company moratorium, which may last for up to a year
  • restrictions on creditors issuing statutory demands and winding-up petitions and enforcing floating charges during a moratorium, and
  • a new restructuring process by which a restructuring plan can more easily be imposed on dissenting creditors.

The legislation also grants super-priority to certain pre-moratorium debts (including certain secured and unsecured banking and finance arrangements and intra group loans) which means that they will rank above pension debts (including those secured by a floating charge) where a company enters into administration or insolvent liquidation within 12 weeks of a moratorium ending.

For suppliers, the legislation increases the risk that customers and clients will not make payments when due – as a creditor’s threat to serve a winding-up petition has been weakened – which may push liquidity issues through supply chains. Other reforms affect the balance between creditors and other stakeholders, with which the legislature has previously been cautious about interfering.

Many of the proposed reforms could have been achieved with less radical amendments to the Insolvency Act 1986. Consultation with industry, practitioners or policy makers has been limited. Most fundamentally, the Act introduces a debtor-in-possession insolvency procedure for the first time in English law. Introducing such sweeping reforms during a crisis risks unintended consequences.

These reforms are likely to impact all companies, whether in financial distress or not, and may well alter the relationship between contractual counterparties as companies attempt to trade through this crisis. It may also alter the approach of banks and other lenders where a company is in financial distress.

It is vital that businesses understand the potential impact of these changes on their supply chains. Trustees of DB schemes should also take immediate steps to assess the impact of these changes on their scheme and, in particular:

  • on the amount that the scheme might stand to recover in the event that a sponsor becomes insolvent, and
  • on the protection afforded by any contingent security that the scheme has the benefit of.

Key reforms

In summary, the key reforms to the UK insolvency regime (which are all now in force) include:

New company moratorium: A novel, free-standing moratorium (unconnected to any other insolvency process) giving up to 40 business days of protection (or up to one year with Court or creditor approval) during which a payment holiday will apply to all pre-moratorium debts except certain limited categories (principally for liabilities to employees and to suppliers under financial services contracts and instruments, whether or not that is the suppliers’ business (meaning lending from related parties, such as other group companies, falls within the excepted category)).

The moratorium restricts legal processes against a company, including commencing a claim, commencing insolvency proceedings, crystallising a floating charge and forfeiture. Directors retain management control. An insolvency practitioner will be appointed as a moratorium “monitor”, responsible for ensuring that the moratorium is at all times likely to result in rescue of the company as a going concern. The monitor’s consent will be required for many company payments. Liabilities incurred during the moratorium will be payable as expenses, and therefore effectively prioritised. Fixed and floating charge assets will be capable of disposal by the company subject to certain restrictions.

New restructuring plan: This is effectively an enhanced scheme of arrangement with similar broad scope. Significantly, however, this reform allows the court to impose a compromise on a company’s creditors and shareholders (by way of a cross class cram-down), as although a compromise needs approval by the court and 75% of the creditors in each class, the court can override rejection by one or more class.

Super-priority for bank debts and other lending: In a significant change to the existing priority order for the payment of debts where a company becomes insolvent or enters administration, the Act grants super-priority to certain pre-moratorium debts (including secured and unsecured banking and finance arrangements and intra-group loans) where a company enters into administration or insolvent liquidation within 12 weeks of a moratorium ending. These super-priority debts would rank ahead of all other unsecured debts and floating charge security (albeit not any fixed security) and even ahead of a liquidators’ or administrators’ own remuneration.

As a result, these debts will jump above debts due to a DB scheme (even where these debts are secured by a floating charge) where an insolvency process follows shortly after a moratorium ends (which will almost always be the case where a corporate rescue is not possible).

Although some amendments have been made to the legislation as it made its way through Parliament to try to prevent pre-moratorium debts from being accelerated during a moratorium (a mechanism that could otherwise have been used by lenders to secure super-priority status for their entire finance debt), these changes will not prevent banks and other lenders from accelerating their debts (where they have the contractual right to do so) before a moratorium begins. It is also doubtful that the restriction will prevent lenders from calling in ‘on demand’ debt during a moratorium so that the entire debt gains super-priority status.

In any event, by prioritising a company’s finance arrangements (whether with its bankers or related parties) over its pension and other unsecured debts and over obligations secured by way of a floating charge, the Act will reduce the amount that DB schemes and the PPF can expect to recover in a future liquidation or administration.

Winding-up petitions: Winding-up petitions cannot be presented if based on statutory demands dated 1 March 2020 to 30 September 2020. Creditors will also be prevented from winding-up a company unless the creditor has reasonable grounds to believe that coronavirus has not had a financial effect on the company or that the company would have become insolvent even absent coronavirus’ effect, which will be a significant hurdle for most creditors. Winding-up will now commence from the date of the order, meaning that transactions entered into between the petition and the order will no longer be automatically void unless specifically validated by an order of the court.

Ipso facto (termination) clauses: Contractual clauses permitting a supplier of most goods or services to terminate supply as a result of the customer’s entry into an insolvency procedure will cease to have effect. The supplier will not be able to exercise any pre-existing right to terminate either. Suppliers will also not be able to withhold supply to the company in insolvency until pre-insolvency debts are paid, preventing ransom payments being sought.

Suspension of wrongful trading: When determining what contribution, if any, a director should make to a company’s assets following a finding of wrongful trading, the Court must assume that a director is not responsible for any worsening of the financial position between 1 March and 30 September 2020. While otherwise directors may feel compelled to cease trading so as to take every step to minimise loss to creditors once they believe that there is no reasonable prospect of avoiding insolvency, directors can now take some comfort that they will not be liable for any deterioration since 1 March 2020. This reform may allow directors to continue trading though other legal duties of directors will continue to apply, including the common law duty to have regard to creditors’ interests when a company is likely to become insolvent. Given the purpose behind the reforms is to ensure that companies continue to trade even when they are insolvent or in financial distress, the need for directors to consider these common law and statutory duties becomes ever more important to avoid personal liability.

Impact on DB pension schemes and the PPF

DB pension schemes are unsecured creditors, which means that any debts owed to the scheme are among the last to be paid out in an insolvency situation unless the scheme has the benefit of some form of contingent security which ranks higher in the priority order (such as a charge over company assets). Consequently, where a scheme is in deficit and the sponsor becomes insolvent it is almost certain that most of the deficit will remain unpaid meaning the scheme is likely to fall into the PPF, which will then take on the responsibility for paying compensation to the scheme’s members.

The changes to the UK’s insolvency regime made by this Act reduce the protection afforded to DB schemes and the PPF where a corporate sponsor is in financial distress by:

  • allowing companies to enter a pre-insolvency moratorium and preventing DB schemes (and most other pre-moratorium creditors) from taking steps to recover existing debts or enforce existing security for up to a year while the moratorium remains in force
  • reducing the amount that DB schemes and the PPF stand to recover on a corporate insolvency where a company makes use of the new moratorium before it enters into insolvent liquidation or administration
  • undermining the protection afforded by floating charges (which many schemes currently have the benefit of)
  • introducing a new restructuring process which could remove any say that the PPF would otherwise have over the terms of any restructuring plan that may be drawn up, and
  • severely limiting the scope for schemes (and other creditors) to issue statutory demands and winding-up petitions prior to 30 September 2020, making it even more difficult than it already is for schemes to recover unpaid contributions from distressed sponsors. By the time action can be taken, it may be too late.

Several of these issues were raised by MPs and peers as the legislation went through Parliament. Some amendments were made, for example, to give the PPF and the Pensions Regulator rights to be notified where a moratorium comes into force or ends and to introduce powers which may be used to give the PPF the ability to exercise certain creditor rights on behalf of trustees (although, this is reliant on secondary legislation). However, these amendments (together with the restriction on accelerated debts gaining super-priority) do not go far enough to prevent the Act significantly eroding the protection and rights afforded to DB schemes and the PPF where a company is in financial distress.

What should trustees do now?

In light of these changes to the UK insolvency regime, trustees should take immediate steps to:

  • understand the changes and what they mean for their scheme
  • assess the impact of these changes on the strength of their employer covenant and, in particular, on the amount that their scheme might stand to recover on a sponsor’s insolvency, and
  • assess the impact of these changes on the protection afforded by any contingent assets, including floating charges and company guarantees, that their scheme currently has the benefit of.

These changes will also be an important factor for trustees to consider if they receive a request to defer or reduce deficit reduction contributions or payments to cover scheme expenses or if they receive a request to extend a deferral that has previously been granted.

Comment

All in all, these changes are not good news for DB schemes or the PPF. It is not yet clear how schemes or the PPF will respond, but it may force trustees to take pre-emptive action in order to protect their scheme’s position. It is also likely to lead to more demands from trustees for contingent security in the form of fixed charges or letters of credit (which fall outside of an insolvent company’s estate) from corporate sponsors.

To date during this crisis, the Pensions Regulator has adopted a pragmatic approach encouraging trustees to give sponsors of DB schemes breathing space by agreeing to defer deficit reduction contributions, provided the scheme is treated fairly and its interests are appropriately safeguarded. However, the scope of these changes may force the Pensions Regulator to adopt a tougher approach, which may be to the detriment of distressed DB sponsors. Therefore, it will be important to look out for any reaction or change in approach from the Pensions Regulator.

Contact us

Directors and trustees need to understand these changes to the UK insolvency regime and how they may impact their business/scheme. If you wish to discuss these changes further please contact any of our experts below or speak to your usual Herbert Smith Freehills’ contact.

Rachel Pinto
Rachel Pinto
Partner, Pensions, London
+44 20 7466 2638
John Whiteoak
John Whiteoak
Partner, Restructuring, Turnaround & Insolvency, London
+44 20 7466 2010
Tim Smith
Tim Smith
Professional Support Lawyer, Pensions, London
+44 20 7466 2542

 

 

 

 

 

 

 

 


Recent posts

Insolvency Bill will “seriously weaken” the position of DB schemes and the PPF warn peers

Pensions Regulator opens door for schemes to transfer to DB consolidators

Regulator updates Covid-19 guidance for DB trustees and sponsors

 

New rules for Coronavirus Job Retention Scheme apply from today

The Coronavirus Job Retention Scheme (CJRS) opened for claims on 20 April 2020.

The scheme, which was originally due to end on 31 May, will remain in place and be available to employers in all sectors through to the end of October 2020.

However, a number of changes will apply from today (1 July 2020). These are reflected in our updated briefing on the CJRS and pensions.

The briefing also examines the impact of the CJRS and flexible furlough on pension contributions, auto-enrolment, salary sacrifice arrangements and other salary-related benefits.

Changes to the CJRS

From today, there is greater flexibility under the CJRS, with furloughed employees being allowed to return to work for their employer on reduced hours. Where furloughed employees return to work on a partial basis, an employer will continue to be able to make a claim under the CJRS to cover some of the costs associated with the employee’s normal contractual hours for which they are not working.

In addition:

  • the CJRS is now closed to new entrants (with limited exceptions), meaning a claim can only be made in respect of any period on or after 1 July to the extent that it relates to an employee who has previously been furloughed for a minimum of 3 weeks prior to 30 June 2020 (other than an employee who is returning from statutory family leave or who is a returning military reservist), and
  • the process for making a claim is changing for periods on and after 1 July.

Sharing the costs

Employers will also be required to start sharing the cost of the scheme with effect from 1 August 2020, so that:

  • from that date, employers will no longer be able to recover the cost of employer pension contributions or employer NICs under the CJRS
  • for the period 1 September to 30 September 2020, the government will pay 70% of wages up to a cap of £2,187.50 for the hours the employee does not work. Employers will be required to pay employer NICs and pension contributions and 10% of wages to make up a total of 80% capped at £2,500, and
  • for the period 1 October to 31 October 2020, the government will pay 60% of wages up to a cap of £1,875 for the hours the employee does not work. Employers will be required to pay employer NICs and pension contributions and 20% of wages to make up a total of 80% capped at £2,500.

In addition, where a furloughed employee returns to work on reduced hours, the cap that applies to the amount that can be claimed under the CJRS will be reduced to reflect the proportion of the employee’s usual contractual hours during which they have not worked.

Comment

The CJRS has enabled many employers to retain staff who they might otherwise have had to make redundant as a result of the economic impact of Covid-19 and the measures introduced to limit its spread. The CJRS remains in place to support employment, and with increased flexibility, as the lockdown restrictions begin to ease and as businesses re-open and start to expand their operations once again.

However, with this new flexibility comes increased complexity. Therefore, it is vital that employers understand the new rules around flexible furlough, eligibility, recoverability and making claims and that they consider how the changes will impact their pension contributions and other employee benefits.

Tim Smith
Tim Smith
Professional Support Lawyer, Pensions, London
+44 20 7466 2542

 

HSF Pensions Round Up – 26 June 2020

Here is a round-up of the COVID-19 and non-COVID-19 related pensions briefings and blogs that we have published recently. Together with links to some of the firm’s COVID-19 webinars which we think will be of general interest.

To limit the number of emails that we send to you at this time we have not sent all of these to you separately. The latest updates can be found on our UK pensions blog at any time.

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Pressure points: Regulator updates Covid-19 guidance for DB scheme trustees and sponsors

On 16 June, the Pensions Regulator updated its DB scheme funding and investment: COVID-19 guidance for trustees to reflect the Regulator’s evolving approach to issues such as requests to defer deficit contributions and monitoring employer covenants and in response to developments since the guidance was first published.

Since the original guidance issued in April, the Regulator has been monitoring how trustees and employers have reacted to the Covid-crisis and the uncertain economic climate. The guidance therefore provides an update of the impact of Covid-19, and how the Regulator is adapting its approach in light of this.

Suspending or reducing contributions

The evidence suggests that around 10% of schemes have agreed a temporary suspension or reduction of deficit repair contributions (DRCs) so far. However, the Regulator is aware that some schemes are still in discussions about possible deferrals and future requests are likely as more employers experience trading and liquidity issues. Extensions to existing suspensions may also be required.

In particular, the guidance notes that given the timing of the start of business restrictions and closures due to the pandemic, employer loan and banking covenant tests at 31 March 2020 are unlikely to have been adversely affected. However, 30 June 2020 and future covenant tests may be significantly impacted. This could result in funders seeking increased protections from employers and lead to further requests of trustees.

Therefore, the Regulator’s approach to DRCs remains largely the same with the Regulator continuing to recognise that “DRC suspensions or reductions may continue to [be] appropriate”. However, the Regulator expects that discussions with lenders and other creditors will have progressed since its original guidance was published and employers are now likely to have more meaningful financial projections as part of an updated business plan, albeit that this will need to take account of various scenarios that might play out. As such, there is a greater emphasis on trustees undertaking due diligence on the employer’s financial position and the sponsor covenant before agreeing to a new suspension or reduction and the Regulator “does not expect trustees to unquestioningly extend their original suspension arrangements on a three-month rolling basis based on limited information”.

Due diligence and the employer covenant

When assessing their employer covenant, trustees need to decide whether there is a short term impact from the crisis or if there has been a material deterioration in the employer covenant which is unlikely to be remedied in the short term. If the latter is the case, trustees should consider whether to update their scheme’s funding arrangements.

Protecting members’ interests

Whilst a request to defer may be reasonable and trustees should be open to such requests, the Regulator emphasises that trustees should make an informed assessment of whether the request is in the members’ best interests, even if a request is part of a larger co-ordinated request across other stakeholders that may appear equitable.

The guidance provides examples of protections that trustees may want to consider when deciding whether to agree to a request including:

  • requiring all dividends and other forms of shareholder distribution to stop throughout the period of suspension
  • agreeing triggers for contributions to start again or increase
  • putting in place legally enforceable protections to ensure equitable treatment of the pension scheme alongside other creditors
  • ensuring access to security/valuable assets, particularly where a suspension or reduction of contributions is agreed as part of a refinancing or other amendment process (as well as fully understanding the terms and conditions, costs and enhancements of any finance agreement),
  • ensuring an ongoing provision of information from the sponsor and undertaking enhanced monitoring of the employer’s and (if applicable) wider corporate group’s trading and liquidity position, and
  • ensuring that reduced or suspended contributions will be repaid within the current recovery plan timeframe and that the recovery plan is not lengthened unless there is sufficiently reliable covenant visibility available to justify this.

The Regulator expects that the less confidence trustees have of getting access to timely and relevant financial information, the shorter any reduction or suspension should be. Similarly, when there is little or no information available regarding the strength of the employer covenant trustees should only agree to a short-term suspension of contributions. In addition, trustees should consider carefully how appropriate a suspension is if the contributions due during the proposed suspension period are substantial or if a one-off payment or annual contributions is due during that time.

Whilst the Regulator’s guidance does not explicitly address this, it is also important that trustees take account of the proposed changes to UK insolvency law contained in the Corporate Insolvency and Governance Bill which are due to come into force within a matter of weeks before they agree to a suspension or reduction. These changes may materially impact the amount that a DB scheme may expect to recover where a sponsor experiences financial difficulties. They may also reduce the protection afforded by existing security or contingent assets that a scheme may have the benefit of.  Read our recent blog on the Corporate Insolvency and Governance Bill to find out more about the potential impact of the Bill on DB schemes and the Pension Protection Fund.

COVID-19 questions for covenant monitoring and contingency planning

The initial guidance listed a number of questions that the Regulator expects trustees to be asking their sponsor regarding COVID-19. Further questions have been added including:

  • In what ways has the sponsor considered how the impact of the virus and the measures to contain it may affect its debt burden?
  • What are the assumptions and scenarios that have been used to prepare forecasts or projections?
  • What financial information is being provided to other key stakeholders?
  • For how long are current borrowing facilities expected to be sufficient?
  • Is the employer discussing further funding facilities?
  • Are funders seeking new security and, if so, what impact will this have on the scheme?
  • What is the position of trade credit insurers?
Reporting requirements

The Regulator has reinstated the requirement for trustees to report any agreement to suspend or reduce contributions and, depending on how a suspension is implemented, it expects trustees to either submit a revised recovery plan or a report of missed contribution with an accompanying explanation.

Requests to release security

The guidance advises trustees to think carefully before considering a request from an employer to release security, as there is the possibility that if the employer fails to recover, the scheme will have lost access to a potentially valuable asset and it is very unlikely that security release is in members’ best interests.

Trustees should be provided with a business plan and forecasts explaining why the request is being made. Schemes should be treated equitably with other creditors and requests should not be limited to them.

Valuations due to be finalised

The guidance remains largely the same for schemes regarding actuarial valuations.

Where trustees are close to completing their valuation and they have agreed the assumptions with their scheme sponsor, the Regulator does not require them to allow for any higher deficit that would exist if they took account of post-valuation experience in their recovery plan. However, it does expect trustees to take account of relevant post-valuation experience in considering the rate and timing of contributions that an employer can reasonably afford to pay under any recovery plan.

Where trustees have passed or are approaching the 15 month deadline for submitting a valuation but they need more time to complete it as a result of the current economic uncertainty, the Regulator has said it will continue to take a reasonable approach to late submissions caused by Covid-19 issues. In particular, some trustees may consider it to be in the best interest of their members to take more time to consider the impact of the current situation on the scheme and the sponsor rather than submit a valuation and associated documents which may need to be re-negotiated soon.

Transfer values

Trustees are required to resume reporting any breaches of their transfer obligations from 1 July 2020. The Regulator reminds trustees of the need to continue to send members the new template warning letter and to monitor requests and patterns. Where trustees encounter delays in processing a transfer request for Covid-related reasons they may want to consider applying for an extension of up to three months to issue CETV quotations, which can be granted where a delay is caused by reasons out of the trustees’ control.

Scheme investments

The updated guidance remains largely the same on scheme investments.

The Regulator continues to expect trustees to:

  • review their scheme’s cash flow requirements and how they expect those obligations to be met. They should allow for issues such as additional ‘cash strain’ arising from increased member movement, potential reduction in or suspension of DRCs, lower levels of investment income and investment ‘cash calls’
  • review and manage specific risks which may now exist within their portfolios or within their sponsoring employer’s business, such as concentrations of risk and/or exposures to deteriorating sectors/credits
  • review any previously agreed investment and risk management decisions due to be implemented in the future to ensure they remain appropriate, efficient and do not introduce risks or crystallise losses
  • review their investment governance structures and delegations to ensure they can continue to function and make decisions in the event of trustee incapacity or absence, and
  • assess, following the recent performance of their scheme, whether they should make any changes to their investment and risk management governance framework.

A new paragraph has been included to say that evidence suggests that there has been a broad range of impacts on scheme funding positions, depending on the scheme’s pre-COVID asset allocation, the degree of hedging and trustee risk management and contingency planning. Over the last few months, the Regulator has seen high-levels of volatility in investment markets and funding positions.

Dealing with difficult decisions

The guidance now includes a new section on dealing with difficult decisions, which outlines the need for trustees to take professional advice (where appropriate), the importance of information sharing, the need for trustees to manage conflicts of interest and the need to keep full records of decision-making processes.

Trustees should consider the need to take professional advice when they have difficult decisions to make and the decision is material to the scheme or employer. This includes taking advice on the strength of the employer covenant, to understand the scheme’s position in refinancing, restructuring and insolvency scenarios and to understand the options in any negotiations with the scheme’s sponsors.

Regarding the costs of advice, trustees may want to check whether their trust deed and rules allows for expenses to be paid from scheme assets, even if the employer usually pays. If the governing documents do not provide for expenses to be paid from scheme assets, the employer and trustees may wish to consider whether it would be appropriate to amend the trust deed to permit this.

The guidance emphasises the need for employers to provide trustees with the information they need to make informed decisions and the importance of trustees keeping full records of their decision making and how they reached their conclusions, in case they need to justify those decisions in future down.

Guidance for employers

The Regulator’s has also updated its Covid-19 guidance for employers on DB scheme funding to ensure it is consistent with the update guidance for trustees. With the increased emphasis on due diligence by trustees, the guidance for employers focuses on the need for employers to provide trustees with the information they need and in a timely manner.

The Regulator confirms that employers can expect it to be reasonable where trustees are being asked to agree to previously unforeseen arrangement (such as reductions or suspensions in DRCs, or additional debt being secured over employer assets) provided that:

  • the need for this can be justified
  • a plan is made for deferred scheme payments to be caught up
  • a plan is agreed for mitigating any detriment caused to the scheme, and
  • the scheme is being treated equitably compared with other stakeholders: in particular, payments to shareholders (as well as other forms of value leaving the employer) to have stopped.

The Regulator also strongly recommends that employers document their position regarding the treatment of their schemes, particularly as this may assist in any future engagement with us.

Comment

The updated guidance indicates that the Regulator is continuing to adopt a pragmatic approach to requests from employers to defer or reduce deficit reduction contributions or for trustees to agree to other arrangements (such as corporate re-financing) where the reasons for this are related to Covid-19 and the request can be justified and where the scheme is being treated fairly and equitably. However, the Regulator expects trustees to carry out more due detailed due diligence now that more information is likely to be available on how the current economic crisis has and will continue to impact the sponsor’s business and how its lenders and other creditors are responding.

That process and the decision for trustees to agree to a contribution reduction or suspension may become more complicated if the proposed changes to the UK insolvency regime are implemented as planned in the coming weeks.

Contact us

If you have any queries about the updated guidance or any of the points covered in this blog, please contact your usual HSF adviser.

 

Tim Smith
Tim Smith
Professional Support Lawyer, London
+44 20 7466 2542
Francesca Falsini
Francesca Falsini
Paralegal, Pensions, London

 

 

 

 

 

 

 

 


Recent posts

Insolvency Bill will “seriously weaken” position of DB schemes and the PPF warn peers

FCA pushes ahead with plans to improve DB transfer market

COVID-19: Pressure points: Key pensions-related guidance (UK)

Pension contributions and partial furlough (UK)

 

 

Pressure points: Pensions Regulator updates guidance on reporting requirements and enforcement activity

On 16 June, the Regulator updated its guidance on reporting duties and enforcement activity to clarify which easements will continue to apply until 30 September 2020 and which reporting requirements will resume as normal from 1 July 2020. The changes were also confirmed in a press release.

Reporting requirements

From 1 July, reporting requirements will resume as normal, in relation to:

  • suspended deficit repair contributions – trustees will need to submit a revised recovery plan or report of missed contributions
  • late valuations and recovery plans not being agreed
  • delays in issuing cash equivalent transfer quotations and making payments,
  • a failure to prepare audited accounts, and
  • master trusts.

In relation to late payment reporting, pension providers will continue to have 150 days to report late payments of contributions (other than deficit repair contributions), where the Regulator would normally require reports of late payments to be made within 90 days. It is unclear if this easement only applies to providers of DC workplace pension schemes or if it extends to trustees of DC occupational pension schemes as well. In any event, the Regulator has said it will review this easement again at the end of September.

Enforcement activity

  • Chair’s statements – The updated guidance confirms that the Regulator will not be reviewing any chair’s statements (including in relation to master trusts) until after 30 September 2020. Statements submitted prior to this date will be returned unread. However, this should not be taken as an indication that the statement meets all of the applicable statutory requirements. It is unclear whether Chair’s statements that are returned unread will be reviewed after 30 September or not. Trustees are reminded of the need to submit their Chair’s statement on time as the legislation does not give the Regulator any discretion to waive fines for late submission.
  • Late audited accounts – The Regulator has said it will take a “pragmatic approach” to late preparation of audited accounts and will not be taking enforcement action on late accounts signed off by 30 September 2020.
  • Investment governance – The Regulator does not anticipate taking regulatory action so long as a review of a scheme’s statement of investment principles (or statement in relation to any default arrangement) is not delayed beyond 30 September 2020. The long-stop date was previously 30 June.
  • Annual benefit statements – In the Regulator’s press release, it confirmed that it would continue to take a “pragmatic approach” accepting that the “impact of COVID-19 means schemes need additional time to issue these to members”.
  • Relationship-managed schemes – For schemes in relationship-managed supervision, the Regulator has reiterated that it will be focusing more on near-term risks rather than the standard activities in its supervisory cycle and they will be speaking to relationship-managed schemes to better understand their position and the risks and issues that have arisen.

Pension transfers and scams

Trustees are reminded of the need to continue to issue the new template warning letter to all members requesting a CETV quote and to monitor requests for concerning patterns. Trustees who identify unusual or concerning patterns should contact the FCA on DBTransferSchemeInformation@fca.org.uk.

Services for vulnerable members

Separately, the Regulator has added information on maintaining services for vulnerable members in its Scheme administration: COVID-19 guidance for trustees and public service. In particular, they are reminded of the need to maintain services for those who are not online and potentially vulnerable through the safe and secure processing of post and by providing a telephone service for critical queries.

In addition, where services are disrupted administrators should maintain a record of which processes, functions or projects are being affected, and keep a log of non-priority queries and actions to deal with when capacity allows.

Tim Smith
Tim Smith
Professional Support Lawyer, London
+44 20 7466 2542
Francesca Falsini
Francesca Falsini
Paralegal, Pensions, London

 

 

 

 

 

 

 

 


Recent posts

Pressure points: Regulator updates Covid-19 guidance for DB scheme trustees and sponsors

Insolvency Bill will “seriously weaken” position of DB schemes and the PPF warn peers

FCA pushes ahead with plans to improve DB transfer market

COVID-19: Pressure points: Key pensions-related guidance (UK)

Pension contributions and partial furlough (UK)

 

 

COVID-19: Pressure points: Key pensions-related guidance (UK)

A plethora of guidance is being produced to help employers and trustees deal with the issues arising from the spread of COVID-19 and the measures that have been introduced to limit this.

The table below (which we will update as new guidance is issued) provides links to the key pensions-related COVID-19 guidance issued to date by the Pensions Regulator, the PPF, HMRC and other bodies and links to our associated blogs and briefings.

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Pension contributions and partial furlough (UK)

From 1 July 2020, furloughed employees can return to work on a part-time basis. Other changes are also being made to the Coronavirus Job Retention Scheme (CJRS) from this date, including to the way in which claims will need to be submitted. In addition, from 1 August, employers will be required to cover the full cost of employer pension contributions (and employer NICs) even for periods when a furloughed employee is not working. These changes are summarised in our recent blog on the changes to the CJRS that were announced on 29 May 2020.

New complexities

The introduction of partial furlough (from 1 July) and the requirement for an employer to cover the full cost of employer pension contributions (from 1 August), will introduce new complexities into the calculation of employer and employee pension contributions and into the amount that employers can claim under the CJRS (for July).

In particular:

  • Where a furloughed employee returns to work part-time on or after 1 July, employers will be required to cover the cost of the employer pension contributions (and employer NICs) payable in respect of that employee for any hours that they work. These contributions will need to be paid at the usual rate (i.e. ignoring any reduction to the employer contribution rate that applies during furlough) and based on the employee’s normal (i.e. non-furloughed) salary. For July, the employer will continue to be able to claim back the cost of the employer pension contributions payable on the individual’s furlough salary (up to 3% of the employee’s “qualifying earnings”) for the normal hours that the individual does not work.
  • From 1 August 2020, the amount of support provided under the CJRS will be tapered and employers will be required to cover the full cost of employer pension contributions (and employer NICs) even for hours not worked from 1 August onwards. Where an employer has agreed to pay a lower contribution rate while an employee is on furlough they will only be required to pay contributions based on that lower rate for any hours not worked while an employee remains on furlough. However, if a furloughed employee returns to work part-time, the employer will need to ensure that
    • employer and member pension contributions for hours not worked are calculated by reference to the rate and on the basis that applies under the furlough agreement put in place with the relevant employee, and
    • employer and member pension contributions for any hours worked are calculated by reference to the contribution rate that would ordinarily apply (i.e. ignoring any reduction in the employer and employee contribution rates that applies during furlough) and based on the employee’s normal (i.e. non-furloughed) salary.
  • Additional complexities will arise, and extra care will need to be taken, where an employee pays their pension contributions via a salary sacrifice arrangement, as an employer may be required to cover the cost of some or all of the employee’s pension contributions (for any normal hours not worked) in addition to the employer pension contributions attributable to any non-worked hours. The employee’s own pension contributions can be deducted by way of salary sacrifice in the usual way (assuming the salary sacrifice arrangement has not been brought to an end) for any hours that the employee is working (and being paid their usual contractual salary) in accordance with a partial furlough agreement.

This additional complexity in the calculation of pension contributions and the amount that can be reclaimed in respect of employer pension contributions for July will be compounded by the changes that are being made to the way in which employers make a claim under the CJRS from 1 July onwards.

Making a claim – Changes from 1 July 2020

The updated Steps to take before calculating your claim guidance confirms that, from 1 July, claims can only cover days within one calendar month, but this does not prevent the furlough itself from overlapping months – there is no need for an employee’s furlough to be ended and restarted with each month-end.  For some employers, claim periods may well differ from pay periods. This will introduce extra complexity.

In particular, the updated guidance provides that:

  • Claims for any furlough periods starting before 1 July must end on or before 30 June (and be submitted by 31 July 2020).  Separate claims will need to be submitted to cover the days in June and the days in July, even if employees are furloughed continuously.
  • Claim periods starting on or after 1 July must start and end within the same calendar month and must last at least 7 days unless claiming for the first few days or the last few days in a month. Employers can only claim for a period of fewer than 7 days if the period they are claiming for includes either the first or last day of the calendar month, and they have already claimed for the period ending immediately before it.
  • Employers can only make one claim for any period so must include all furloughed or flexibly furloughed employees in one claim, even if they are paid at different times. Where employees have been furloughed or flexibly furloughed continuously (or both), the claim periods must follow on from each other with no gaps in between the dates.  Employers using flexible furlough should ideally claim only once they are sure of the exact number of hours being worked during the claim period. If claims are made in advance and turn out to be too high, the overclaim must be paid back.
  • Where an employee is flexibly furloughed, the employer will need to calculate “usual hours”. This is because the 80% grant available and the monthly cap are reduced to reflect the proportion of “usual hours” that will be furloughed (so if the employee is to work 50% of usual hours, the grant will be half of 80% of usual wages subject to a monthly cap of £1,250). An employee’s “usual hours” will need to be determined as followed:
    • for those who are contracted to work a fixed number of hours and whose pay does not vary according to hours worked, the “usual hours” are the contractual hours as at the end of the last pay period ending on or before 19 March 2020
    • for those on variable hours and pay, the “usual hours” are the higher of either the average number of hours worked in the tax year 2019 to 2020, or the corresponding calendar period in the tax year 2019 to 2020, including any hours of leave for which the employee was paid their full contracted rate (such as annual leave) and any hours worked as ‘overtime’ where pay for those hours was not discretionary, and
    • for piece workers, the same applies as for variable hours workers, but if the hours worked are unknown, the hours should be estimated based on the number of ‘pieces’ produced and the average rate of work per hour.

The Calculate how much you can claim guidance sets out how to do the rather complicated calculations required, including for flexible furlough and once the employer contributions increase in stages from August to October.  A new example of calculating a claim for a flexibly furloughed employee has been published and the previous examples of calculations have been updated.  A cold flannel is advised.

The Claim for wages guidance confirms that the information required for a claim will include the number of “usual hours” the employee would work in the claim period, the number of hours they will or have worked, and the number of furloughed hours in the claim period.  Records of this information and also the calculations required to calculate the usual hours should be kept. The guidance also includes some new text explaining how errors made in claiming will be addressed.  If a further claim is being made, that will be adjusted to reflect a previous overpayment; a process is being worked on to recover overclaimed amounts if no new claims are planned.  If there has been an underclaim, the employer should contact HMRC to amend the claim, as it will need to conduct additional checks.

Latest news

For more information on the latest pensions and employment developments in relation to the CJRS and COVID-19 more generally, check out our employment blog and recent posts on our UK pensions blog.

Contact us

Please get in touch with your usual HSF contact if you would like to discuss any of the issues outlined in this blog.

 

Tim Smith
Tim Smith
Professional Support Lawyer, London
+44 20 7466 2542

 

 

 

 

 

 

 


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Further guidance on partial furlough published (UK)

On 12 June, HMRC published updated guidance to reflect the changes to the Coronavirus Job Retention Scheme (CJRS) to permit flexible furlough from 1 July and require increasing levels of employer contribution from 1 August. Changes are also being made to the eligibility criteria for the CJRS and to the way in which claims must be made.

These changes were announced on 29 May and further guidance was promised by 12 June. Many of the amendments to the guidance pages simply add the information already provided in the 29 May Fact Sheet. However, some further details have been added which we highlight below.

The legal framework for the revised scheme will require a further Treasury Direction as the current one only applies until 30 June; no date for publication of a revised Direction has been given.

Changes to the CJRS

In summary, the changes to the CJRS announced on 29 May 2020 are that:

  • Claims for periods after 30 June 2020 will only be possible from employers who have previously used the scheme in respect of employees they have previously furloughed for a 3 week period ending no later than 30 June – the latest an employee can be placed on furlough for the first time is therefore 10 June 2020.  Employers will have until 31st July to make any claims in respect of the period to 30 June.
  • Partial furlough will be possible from 1 July 2020.  From that date, employers will be able to claim in respect of previously furloughed employees either for full furlough, or for partial furlough where employees work part of their normal hours.  The employer must pay wages and employer NICs and pension contributions for the hours worked, and can make claims under the CJRS in respect of the normal hours not being worked. There is no restriction on the working hours or shift pattern but employers must agree the arrangement with their employee and confirm that agreement in writing.  The minimum period for a claim will be a week. Further details will be included in future guidance to be published on 12 June.
  • For July, the CJRS grant will continue to cover 80% of wages for unworked hours (subject to the monthly cap of £2,500 or, for partial furlough, a proportionate cap reflecting the hours not worked), plus associated employer NICs and pension contributions.
  • For August, employers must pay the employer NICs and pension contributions for the hours not worked;  the CJRS grant will continue to cover 80% of wages subject to the cap.
  • For September, employers must contribute 10% of the capped wages (plus employer NICs and pension contributions) with the government paying 70% of capped wages for the hours the employee does not work (so the employee continues to receive 80% wages subject to the cap).
  • For October, the employer contribution increases to 20% (plus employer NICs and pension contributions) and the government contribution reduces to 60% of capped wages.
  • Employers can continue to top up wages to 100% if they wish.
  • The scheme will close on 31 October 2020.

These changes are reflected in the updated guidance.

All of the guidance notes have been updated, with the exception of the “Work out 80% of your employees’ wages” page, the text from which has effectively been updated and moved to two new pages entitled “Steps to take before calculating your claim” and “Calculate how much you can claim“.  (The holiday pay section in the Work out 80% page has been moved, substantively unchanged, to the Check if you can claim page, so that the Work out 80% page is no longer relevant.) There is a helpful page with links to all the current guidance here and an overview focussing mainly on the changes to employer contribution levels here.

Eligibility criteria after 30 June 2020

The updated guidance confirms the key eligibility conditions for claiming any type of furlough after 30 June as:

  1. the employer must have successfully claimed a CJRS grant for the relevant employees for a consecutive 3 week period of furlough completed within the period 1 March to 30 June.  There is an exemption for those returning from maternity, shared parental, adoption, paternity or parental bereavement leave who were on payroll on or before 19 March and on leave before 10 June (and provided the employer has met the condition for other employees).  The employee does not need to actually be on furlough on 30 June, as long as they have already completed a furlough period of 3 consecutive weeks.  The employer must claim for furlough periods up to 30 June by 31 July.
  2. the number of employees who can be claimed for cannot exceed the maximum number in any one claim made for furlough periods prior to 1 July (save that family leave returners can be added to that cap).

Where a TUPE transfer takes place after 10 June, the transferee would not be able to meet the first condition in relation to transferring employees even if the employees have been furloughed by the transferor.  Helpfully, the “Check which employees you can put on furlough” guidance confirms that an exception is made in these circumstances where the transferor has submitted a claim for 3 weeks’ furlough prior to 30 June for the relevant employees.  The number of relevant employees is also added to the transferee’s cap under (ii) above, enabling the transferee to continue to furlough these individuals without affecting its ability to furlough its existing workforce.  Similar provisions apply for changes in ownership under PAYE succession rules, transfers from a liquidator, and consolidations of group company PAYE schemes.

Flexible furlough agreements

The requirements for agreeing furlough are set out in the Check if you can claim for your employee’s wages guidance.  This has been reworded and now notes that agreements to furlough should be consistent with equality and discrimination laws, as well as employment law, and that records of hours worked and furloughed should be kept.  The guidance makes clear that flexible furlough will require specific agreement on the new furlough arrangement; there is a reference to a “written agreement” for flexible furlough, whereas full furlough only requires agreement and a written record of the agreement (so that the employee does not have to provide anything in writing).  The difference is probably unintended and will hopefully be corrected. (HMRC may also want to correct the statement that when employees are on furlough, “you cannot ask your employer to do any work”… )

Flexible furlough can involve working for any amount of time and any work pattern; the employer must itself pay for the hours worked and can claim a grant for the furloughed hours (which will be subject to the same conditions as previously, eg not working during those hours).  The guidance makes clear that employers can choose to furlough only part of their workforce and can also continue to fully furlough employees after 1 July if required.

An important point to note is that, if furlough periods start before 1 July, the furlough must still last 3 consecutive weeks (even though it will end after 1 July) in order for the wages to be claimed under the CJRS.  Only furlough starting on or after 1 July can be for any duration (the restrictions being on the period for which claims are made (see below), rather than the period of furlough itself).   However, the employer would need to make claims covering the days in June and the days in July in two separate claims as set out below.

Making a claim – Changes from 1 July 2020

The key document for employers making a claim under the CJRS in respect of periods on and after 1 July 2020 is the new Steps to take before calculating your claim guidance. This confirms that , from 1 July, claims can only cover days within one calendar month, but this does not prevent the furlough itself from overlapping months – there is no need for an employee’s furlough to be ended and restarted with each month-end. For some employers claim periods may well differ from pay periods. This will introduce aditional complexity.

In particular, the updated guidance provides that:

  • Claims for any furlough periods starting before 1 July must end on or before 30 June (and be submitted by 31 July 2020).  Separate claims will need to be submitted to cover the days in June and the days in July, even if employees are furloughed continuously.
  • Claim periods starting on or after 1 July must start and end within the same calendar month and must last at least 7 days unless claiming for the first few days or the last few days in a month. Employers can only claim for a period of fewer than 7 days if the period they are claiming for includes either the first or last day of the calendar month, and they have already claimed for the period ending immediately before it.
  • Employers can only make one claim for any period so must include all furloughed or flexibly furloughed employees in one claim, even if they are paid at different times. Where employees have been furloughed or flexibly furloughed continuously (or both), the claim periods must follow on from each other with no gaps in between the dates.  Employers using flexible furlough should ideally claim only once they are sure of the exact number of hours being worked during the claim period. If claims are made in advance and turn out to be too high, the overclaim must be paid back.
  • Where an employee is flexibly furloughed, the employer will need to calculate “usual hours”. This is because the 80% grant available and the monthly cap are reduced to reflect the proportion of “usual hours” that will be furloughed (so if the employee is to work 50% of usual hours, the grant will be half of 80% of usual wages subject to a monthly cap of £1,250). An employee’s “usual hours” will need to be determined as follows: 
    • For those who are contracted to work a fixed number of hours and whose pay does not vary according to hours worked, the “usual hours” are the contractual hours as at the end of the last pay period ending on or before 19 March 2020.
    • For those on variable hours and pay, the “usual hours” are the higher of either the average number of hours worked in the tax year 2019 to 2020, or the corresponding calendar period in the tax year 2019 to 2020, including any hours of leave for which the employee was paid their full contracted rate (such as annual leave) and any hours worked as ‘overtime’ where pay for those hours was not discretionary.
    • For piece workers, the same applies as for variable hours workers, but if the hours worked are unknown, the hours should be estimated based on the number of ‘pieces’ produced and the average rate of work per hour.

The Calculate how much you can claim guidance sets out how to do the rather complicated calculations required, including for flexible furlough and once the employer contributions increase in stages from August to October.  A new example of calculating a claim for a flexibly furloughed employee has been published and the previous examples of calculations have been updated.  A cold flannel is advised.

The Claim for wages guidance notes that the information required for a claim will include the number of “usual hours” the employee would work in the claim period, the number of hours they will or have worked, and the number of furloughed hours in the claim period.  Records of this information and also the calculations required to calculate the usual hours should be kept. The guidance also includes some new text explaining how errors made in claiming will be addressed.  If a further claim is being made, that will be adjusted to reflect a previous overpayment; a process is being worked on to recover overclaimed amounts if no new claims are planned.  If there has been an underclaim, the employer should contact HMRC to amend the claim, as it will need to conduct additional checks.

Pension contributions and flexible furlough

Care will also need to be taken when calculating employer and employee pension contributions where a furloughed employee returns to work flexibly and when calculating the amount that can be reclaimed in respect of employer pension contributions from 1 July. You can find out more about this in our recent blog which looks at the issues that will need to be considered.

Contact us

Please get in touch with your usual HSF contact if you would like to discuss any of the issues outlined in this blog.

 

Anna Henderson
Anna Henderson
Professional Support Lawyer, London
+44 20 7466 2819

Tim Smith
Tim Smith
Professional Support Lawyer, London
+44 20 7466 2542

 

 

 

 

 

 

 


Recent posts

Pension contributions and partial furlough (UK)

COVID-19 Pressure points: Key action checklists for trustees and sponsors of DB schemes (UK)

COVID-19: People: Key action checklists for trustees and employers of DC schemes (UK)

COVID-19 Pressure points: Pensions Regulator and PPF issue guidance for trustees of DB schemes with distressed sponsors (UK)