With many employers forced into redundancies, furlough schemes or reduced hours, tallying up employee benefits has become challenging. Ben Rowntree gives an update on contract-based pension plans and how these might change in the current situation.
As steps were rapidly taken to drastically reduce costs while business was impacted by lockdown, many pension plans were forced to think on their feet about how schemes could be changed to fit reduced costs. Some areas were relatively clear.
Given the steps taken to reduce costs during the COVID-19 lockdown, pension plan members may, as ever, stop or reduce contributions, possibly rejoining later. If they do so, employers have the choice of whether to continue with employer contributions. Members may then re-join later.
If the member has not opted out, then pension plan contributions must continue to be paid while there are employee earnings. There have been no relaxations in minimum contributions required under auto-enrolment regulations. But, if earnings are reduced and contributions are based on a percentage of earnings, then contributions will, of course, be lower. However, this does depend on your own scheme rules and employment contracts.
More complicated and unclear are contributions paid using salary sacrifice, if pay is reduced. This again depends on your pension plan scheme rules and how the salary sacrifice scheme was set up.
The main impact on pensions for members has been on investment funds. Stock markets around the world have been volatile to say the least. There have been big swings either way, but mainly leading to a significant decrease in the value of members’ pension plan funds. The growth stage default funds for major pension providers have fallen by between 12% and 17% in the month to 30th March 2020 and between 12% and 21% in the last three months.
This is worrying for all members, but likely to have a major impact on anyone who was planning to retire and draw on their pension funds in the near future. Losses may have been limited for individuals invested in funds that use an automatic “lifestyling” approach, decreasing risk levels as they get closer to retirement, but even these funds have fallen in value. More information relating to members close to retirement is included under “retirement planning” below.
Pension plan providers are continually monitoring their investment strategies for lifestyle funds (typically used as default funds), but there has been little, if any change in these. The over-riding response has been that these portfolios are diversified to manage risk anyway, and that the market is expected to recover in time.
Again, several pension plan providers have drafted specific communications addressed to members on the fall in investments. These invariably note that pension investing is generally long term in its nature and investors should be wary of making investment decisions based on short-term falls in the market. They stress the value of continuing to pay contributions when investment markets are low, in order to gain from any recovery.
As part of the Coronavirus Job Retention Scheme, employers can claim for the minimum 3% employer auto-enrolment contributions on qualifying earnings, based on subsidised furlough pay. Employee contributions can still be deducted and paid from employee earnings.
As noted above, members still have the choice of opting out of the pension scheme either permanently or temporarily. If employers are considering reducing contribution percentages, then this would still be subject to the current 60-day consultation requirement. Again, the situation with salary sacrifice isn't so simple and employers should consult their advisers over their unique situations.
It should be noted that the furlough reclaim will be based on an employee’s actual pay from their last pay period before 19 March 2020, or as of 28 February if the employer has already calculated its claim. This will be the employee’s pay after allowing for salary sacrifice. In addition, if only the reclaimable salary is paid, then the amount of the employee’s contribution cannot be deducted from this if contributions are being made using salary sacrifice.
Furthermore, when using salary sacrifice, employers need to consider the level of salary to base contributions on and whether to continue with full contributions. Finally, it should be noted that all contributions should be based on the notional pre-sacrifice salary rather than the residual.
The coronavirus pandemic would be classed as a qualifying event to change salary sacrifice agreements and employers may also want to relax any restrictions to annual windows for re-joining.
Pension providers are trying to carry on as normal to service customers while moving to home working. Some providers are doing this better than others. Most providers have statements or web links available to send to pension plan members. These cover general questions and answers on contributions, opting out and investments.
As noted above, the fall in members’ funds will have a huge impact on those considering retirement in the short term. Fund values are likely to be lower than previously planned.
There are some sources of help for those in this situation, including contacting Pensions Wise or obtaining financial advice. Pensions Wise is a government-sponsored body that provides online information and free appointments with guidance on pension plan matters to anyone aged over 50.
Individuals can also consult an independent financial adviser for specific advice on their own circumstances. Details of advisers in their area can be found at www.unbiased.co.uk.
For those further from retirement, pension plan fund managers are expecting investment markets to recover over time, although this obviously cannot be guaranteed. Consequently, even these members may see their funds at retirement lower than previously anticipated. In addition, if members choose to stop or reduce contributions then this too will affect their fund values at retirement.
Pension plan embers should continue to review their investment strategy on a regular basis to ensure their investments are right for their circumstances.
For help on dealing with contract-based pension plans in the current climate, get in contact with Ben Rowntree.