How will DC stand up to Covid-19 pandemic?

Two master trusts confirmed to Pensions Expert that they have already witnessed a rise in small employers cancelling their direct debits or failing to pay, while others said it was too early to identify any concrete trends.

The government confirmed in March that any workers furloughed under its job retention scheme will have their employer auto-enrolment contributions covered, and has launched a string of stimulus packages aimed at helping to rescue struggling businesses.

But with severe disruptions to supply chains, workers falling sick, and changes to demand, even businesses still running are facing difficulties, leading to some employers not meeting their pensions obligations.

Employers that want to reduce their contributions to the minimum need to be aware that normal market laws are still in place

Adrian Boulding, Now Pensions

Adrian Boulding, director of policy at Now Pensions, said that while the “overwhelming majority of employers are still sending us their data and paying their contributions, we have a small number of employers that are struggling”.

“The message to them is very clear – it is their statutory duty to pay contributions… if employers aren’t paying this month because they have no cash in their bank accounts, they will have to make it up for it later.”

The Pensions Regulator has relaxed its enforcement of auto-enrolment in response to the difficulties experienced by employers, meaning companies are unlikely to be pursued immediately over missed payments.

In a letter seen by Pensions Expert, TPR asked pension providers to not report any employers who are 90 days late in paying their contributions under auto-enrolment regulations, instead using 150 days as a cut-off.

The regulator said it did not intend to issue any new unpaid contribution notices to employers, and asked providers “not to report any new payment failures”.

Mr Boulding stressed that even if businesses have furloughed workers, they must make contributions themselves and be reimbursed by the government. In a positive sign, member behaviour appears largely unchanged.

“Employers that want to reduce their contributions to the minimum need to be aware that normal market laws are still in place,” he continued. “If you want to change practices you need to follow process, either through union talks or through consultations with staff.”

As the economic crisis worsens, some businesses may struggle to meet cash flows, even with the government’s stimulus package. But Faith Dickson, partner at Sackers, said that while TPR has effectively permitted delayed contributions to defined benefit schemes, “there is little sign of the government giving employers a break on auto-enrolment obligations – other than cutting them a bit of slack on reporting late contributions”.

Companies resist retiring employees

So far, the UK government’s job retention scheme is likely to make a push to early retirement for older workers rare, although it is not known if this will change as the economic crisis worsens.

In the US, Boeing is among the hard-pressed aerospace employers already offering early-retirement packages, according to press reports.

Any such packages must be offered with the utmost care. Richard Lee, partner at Gowling WLG, warned that forced retirement “can lead to claims for unfair dismissal, wrongful dismissal and age discrimination in particular”.

“Employers would have to defend dismissal claims on the basis of conduct, capability or redundancy,” he said, but added: “Age discrimination can be objectively justified in limited circumstances.”

Compulsory retirement is allowable to enable succession planning, or “ensuring the quality of work by having a balance of experience and innovation in the workplace”, according to Jeremy Harris, pensions lawyer at Fieldfisher, although he added that this necessity is often difficult to prove.

Compensation is potentially uncapped for those who can prove they were compulsorily retired on age grounds, but justice could be slow in coming. 

David Whincup, partner at Squire Patton Boggs, said: “No live hearings are currently taking place and it is not clear when they will resume. There were delays in the ET system already.”

Admin under spotlight

The implications of the crisis for pensions are huge. For DC, there are question marks over asset security, contribution suspension and life cover during furloughing, while fund closures, already seen in specialist property funds, could particularly impact employees at retirement.

With so many workers now based at home, administration may be creaking, too. TPR has asked outsourcers and in-house teams to focus on paying benefits over more long-term projects.

Stephen Scholefield, partner at Pinsent Masons, advised pension funds “to ensure that their systems can still process retirements”.

“Systems may need to be adapted so that more is done via email, with less emphasis put on things like certified copy documents, which may be hard to obtain,” he added.

Indeed, there are already signs of providers struggling to cope with member demand. The People’s Pension, whose owner B&CE announced it is furloughing 140 staff on Thursday, has told members that it is “only able to respond to queries that have limited online guidance and are unable to be self-served”. Customers may experience “considerably longer-than-usual wait times”, it said.

Furloughing issues remain

Employers will also have to work through complexities introduced by the new furloughing scheme.

“We are still awaiting detailed guidance on pension provision during furlough,” noted Sue Waites, senior consultant at Hymans Robertson.

While the decision to cover contributions has been widely welcomed, employers will still be on the hook for payments above auto-enrolment minimums. Employees will have to continue to make their own contributions, and could face significant cuts while furloughed if they earn more than £2,500 a month, Ms Waites said.

Members may also be tempted to opt out, despite Now Pensions’ findings.

Ms Waites said: “There is a risk that employees who opt out will not opt back in when they are back at work. This could mean missing out on a few years of pension saving until they are picked up again at their next re-enrolment date.”

Life cover could also be important as the pandemic spreads. Chris Mason, a consultant at Quantum Advisory, warned: “If employees have life cover linked to pension scheme membership, they should check with their employer whether cover will be maintained. Employers should also seek reassurance from their insurers.”

Additional reporting by Angus Peters