COVID-19: What do Employers & Trustees Need to Consider for Pension Schemes?
The Covid-19 pandemic is causing employers and trustees of occupational pension schemes to consider what steps they ought to take to ensure that the administration of their pension schemes may continue as smoothly as circumstances allow. This briefing addresses some of the key considerations arising at this time.
Trustees will seek to ensure that their pension schemes continue to be administered and advised appropriately with as little disruption as possible. Many of those providing services to trustees, in particular key function holders, have already communicated their business continuity plans to trustees and employers. Where they have not, trustees should ask them to do so, and to confirm that they have in place sufficiently robust IT infrastructure to facilitate secure, remote working and can continue to carry out key scheme processes. While it seems unlikely, if service providers cannot maintain acceptable service levels, trustees may have to consider what their contingency plan is and what service level agreements provide in such circumstances including any force majeure, termination and liability provisions.
Where face-to-face trustee meetings are no longer possible, a review of the scheme’s trust documents ought to be undertaken to:
- consider whether trustee meetings may take place virtually/remotely and, if such meetings are not currently permitted, what trustees may do in order to conduct trustee business;
- where meetings have not been conducted virtually/remotely previously, draw up protocols necessary for the proper conduct of such meetings;
- consider how a quorum would be met or key decisions taken if a significant number of trustees were to fall ill;
- consider how a replacement trustee chair and/or secretary may be appointed if the current chairman and/or secretary were to fall ill; and
- consider if and how decisions may be taken by written resolution (including by email).
Where documents are to be signed or instructions are to be given to service providers, trustees ought to ensure that:
- signature of documents and the giving of instructions (including investment instructions) may be delegated, and the terms on which the delegation is made by the trustees are clear and include the expiration of the term of the delegation;
- where appropriate, a facility for electronic signatures has been set-up and the terms on which it may be used are clear;
- authorised signature lists are up to date, sufficiently broad and suitably flexible to permit authorisation of instructions; and
- they have access to professional advice to ensure valid execution of documents, in particular deeds, by trustees, including corporate trustees, and principal and participating employers.
In an announcement made on 27 March 2020, the Pensions Authority stated that it would take into account current circumstances when assessing trustees’ compliance with their obligations, adding, however, that it expects that reasonable efforts are made and that trustees and their service providers are proactive and member focussed.
Engagement between Employers and Trustees
Engagement with the principal employer is critical to understanding the impact of the Covid-19 pandemic on its, and other participating employers’, business(es) and the possible consequences for the scheme. If it appears that an employer may not be able to meet its funding obligations, including, in the case of defined benefit (“DB”) schemes, past service deficit repair contributions, engagement between employers and trustees is critical to determine if this is a short term issue or a longer term one. If the principal employer’s covenant has weakened significantly, trustees should seek to explore contingency plans that could provide an increased level of covenant support (e.g. parent company guarantees, letters of credit, contingent assets etc.).
For DB schemes, a review of funding proposals and/or funding agreements may be required to assess if funding proposals will go off track, the consequences of any missed contributions or contribution holidays (such as triggering balloon payments, contingent assets or scheme wind-up) and if any such consequences may be avoided if it is appropriate in the circumstances to do so. Funding proposals in the process of being agreed may require to be revisited. Incomplete enhanced transfer value exercises are likely be postponed.
Trustees should contact their investment consultants if such consultants have not yet been in contact with them to consider the scheme’s financial exposure and what may be done in the short term, if anything, to mitigate any exposure. For defined contribution (“DC”) schemes, trustees should consider if automatic switches as part of a lifestyle default fund are appropriate at this time. Note, on 27 March 2020 the Pensions Authority issued an announcement in which it cautioned against making any immediate investment decisions unless absolutely necessary although it also counselled that trustees should “consider the impact of the current market conditions on the funding position of their scheme and any actions that need to be considered”.
DC members at or approaching retirement may seek to defer exercising retirement options and consideration should be given to agreeing to such this deferral where permitted by Revenue. Members who have recently directed the trustees to effect a transfer out might be asked to confirm their directions to the trustees before the trustees effect the transfer to avoid members crystallising recent investment losses. Members might be permitted to reduce or cease regular contributions and/or additional voluntary contributions and might be permitted to do so out of the usual contribution rate switching cycle if necessary.
Members may be put on reduced hours or part-time programmes or may be subject to temporary lay-off or short-time, and/or salaries may be reduced, each of which is likely to have a pensions’ impact. The Revenue Commissioners have confirmed that pension contributions may not be deducted from payments made under the Temporary Wage Subsidy Scheme, otherwise known as the Covid-19 payments of up to €410. Employers may wish to implement contribution holidays and are likely to require the agreement of trustees to do so. An employer participating in a DC master trust should consider what options it may have and how it may avoid triggering an employer exit.
Trustees shall have to consider any employer proposals in light of the terms of the scheme’s governing documents, the employer’s financial covenant and the trustees’ fiduciary obligations. If scheme amendments are required to implement employer proposals, trustees shall have to consider if amendments are appropriate or if the terms of an employer’s proposals ought to be negotiated and/or mitigated.
Employers and trustees should consider the terms of policies relating to death in service and income continuance and determine if, in accordance with their proposals, cover continues under such policies including where pension contributions temporarily cease and at what salary levels in the event that salaries are reduced. They should also seek confirmation that Covid-19 related deaths and illnesses are not excluded from cover.
How can we help?
The Employment, Pensions & Incentives Group is available to answer any queries you may have in relation to the impact of COVID-19 on pension schemes, and can provide guidance on the legal consequences of measures being considered to respond to the challenges posed by the current climate.
Also contributed by Zoë O’Reilly
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.
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