Pensions Spring Update 2020
This is the Spring 2020 update from our Pensions Group.
We have previously outlined some pensions implications for employers and trustees as a result of the outbreak of COVID-19 in our briefing available here. Since then, a number of other practical issues have emerged in ensuring the ongoing administration of pension schemes through the lockdown period. In addition, regulatory guidance has been published by both the Pensions Authority and the Revenue Commissioners in relation to COVID-19 and pensions.
Revenue guidance on the Wage Subsidy Scheme
The Revenue Commissioners have issued guidance on the Wage Subsidy Scheme (“WSS”) which includes information on how the WSS relates to pensions. The guidance (available here) makes it clear that, where an employer avails of the WSS, employee pension contributions may not be deducted from the subsidy. In respect of employer contributions, the guidance notes that such contributions are not linked to earnings and that there may be contractual arrangements between employers and employees as regards the level of employer contributions payable to a pension arrangement. It does note however, that where an employer ceases to make employer contributions to a pension scheme, this will not affect the scheme’s tax approved status.
Regulatory Guidance – capacity of scheme administrator and other service providers
The Pensions Authority (the “Authority”) has issued two announcements on COVID-19 (the first on 27 March 2020 available here and the second on 24 April 2020 available here) and the European Insurance and Occupational Pensions Authority (EIOPA) has issued a statement on principles to mitigate the impact of COVID-19 on the occupational pensions sector (on 17 April 2020 available here). The key points addressed by the Authority’s announcements include:
- trustees may wish to review their administrator’s business continuity plan to ensure that they are capable of meeting the core administrative functions remotely including paying pensions and other benefits as they fall due and that contributions are remitted to the scheme and invested within statutory timelines. The priority of the continuity of key operational activities was also emphasised by EIOPA in its statement;
- in consultation with the scheme administrator and investment advisers, trustees should evaluate how the scheme’s projected cashflow may be impacted by the current economic climate and take action if necessary to ensure that the scheme has sufficient available reserves to meet its obligations. However, the Authority has cautioned against making any immediate investment decisions unless absolutely necessary. Similarly, in a DC context, EIOPA has stated that communications with members should aim to discourage potential short-term decisions by members that may jeopardise long-term pension outcomes;
- employers/employees may seek a temporary suspension of contributions while the COVID-19 crisis subsists. Trustees should consider the likely impact that a suspension of contributions would have on cashflow and manage that risk appropriately. In its second announcement on COVID-19, the Authority has stated that the question of suspending pension contributions is primarily governed by the contracts of employment, pension schemes rules, and in some cases, specific sectoral legislation and that it does not have the power to override these obligations. The Authority recommends employers considering suspension of contributions to discuss the matter with the scheme trustees, scheme service providers and advisers including seeking legal advice;
- the Authority has also reminded trustees of their obligations to inform members of material changes to their pension benefits and states that trustees should, where practicable, communicate with their members on relevant developments in relation to member pension benefits.
Social distancing and travel restrictions mean that conventional face-to-face trustee meetings cannot take place as usual and trustee meetings are now generally being held by voice/video conference calls. Trustees should review scheme governing documentation (or in the case of a corporate trustee, the company constitution) to check if holding trustee meetings by such means is permissible. If not, the scheme’s trust deed may need to be amended to allow trustee meetings to take place remotely. Provisions regarding the passing of written resolutions should also be reviewed and would ideally cater for approval by email.
We have previously noted that trustees should consider whether insured benefits such as death in service cover can be maintained under the policy terms during the COVID-19 period. Trustees may also wish to undertake a broader review of any other insurance policies in place including trustee liability insurance to determine whether the terms of such policies contain any limitations or exclusions which may restrict COVID-19 related claims.
Review strength of employer covenant
Trustees should ensure their employer covenants are healthy by assessing the likely impact of the COVID-19 crisis on the employer’s business. If the employer covenant is at risk, the trustees may wish to explore changes to the scheme’s investment policy to account for this. In certain circumstances, the trustees may wish to seek alternative options to provide greater covenant support such as seeking parent company guarantees.
General Pensions Update
Pensions Authority regulatory activity
On 3 March 2020, the Authority published its summary of regulatory activity for 2019. The Authority opened 55 new investigations into various alleged breaches of the Pensions Act and finalised and closed 63 investigations during 2019. Convictions were secured in three cases: two related to deduction and non-remittance of employee pension contributions within statutory timelines and one related to a failure to respond to a statutory request for information from the Authority.
In terms of the Authority’s approach for 2020, in its announcements regarding COVID-19, the Authority stated that it is aware of the practical difficulties for completion of many tasks and responsibilities relating to pension scheme administration. While the Authority noted that it will “take into account current circumstances when assessing the trustees’ compliance with their obligations”, it notes that it has no power to waive statutory requirements under the Pensions Act and it “expects that reasonable efforts are made and that the trustees and their service providers are proactive and member focussed.”
The Authority’s regulatory activity has continued despite the COVID-19 lockdown with the Authority securing its first conviction for 2020 on 8 April. This related to a failure to pay employer pension contributions within the statutory timeframe. In addition, the Authority announced on 12 February 2020 that it was adopting a forward looking risk based approach to supervision, as part of which it is undertaking an engagement programme to assess how schemes are meeting their governance and risk obligations. The engagement programme, it stated, would initially focus on some large defined benefit and defined contribution multi-employer schemes. The process will involve the completion of a questionnaire; meeting(s) between trustees and the Authority and a findings report including the Authority’s observations and recommendations. In its COVID-19 announcement, the Authority noted that this programme is continuing.
Despite recent political uncertainty, auto-enrolment remains an area of focus as set out in the Joint Framework document recently published by Fianna Fáil and Fine Gael. The document sets out ten missions that all centre on the wellbeing of Ireland’s citizens. The parties’ “A New Social Contract” mission aims to provide each citizen with accessible and affordable health care, housing, education, childcare and disability services, as well as a living wage, upskilling, and a dignified retirement. The first means of achieving this mission as outlined in the document is to “introduce affordable improvements to benefits and protections under the social insurance system; and introduce a pension auto-enrolment system”.
Accordingly, it would seem that should Fianna Fáil and Fine Gael succeed in forming a government, the introduction of auto-enrolment is likely to remain a feature of that government’s legislative agenda.
EIOPA publishes model pension benefit statements
Under the Irish Pensions Act Disclosure Regulations, Irish pension schemes have long been required to make specific disclosures to individual members regarding their benefits. The objective is to provide individual members with a summary of benefits by reference to their own personal information. Disclosure usually takes the form of an annual member benefit statement sent to active members.
The IORP II Directive seeks to harmonise this requirement at a European level. Every Member State is to require pension schemes to draw up a concise document, known as a pension benefit statement (PBS), which should be made available to each member at least annually. IORP II sets out a list of key information to be included as a minimum in the PBS.
To assist Member States to comply with this requirement, the European Insurance and Occupational Pensions Authority (EIOPA) has created two model PBSs to provide practical guidance on how to implement the annual information document following the implementation of the IORP II Directive. EIOPA states that the model documents demonstrate “how to provide clear information to members on their pension pot and will help them to make more informed decisions about their retirement savings”. The model documents are available here.
While IORP II implementing regulations have yet to be published in Ireland, it is anticipated that most of the requirements regarding PBSs are already substantively covered by existing Irish Pensions Act requirements regarding the content of member benefit statements and trustee annual reports (with the notable difference being that these statements will now have to be issued to deferred members).