17 August 2020 - Post by:Jessica Kerslake
With the Government’s furlough scheme coming to an end and an increased number of redundancies on the horizon, employers and trustees should ensure that they consider the potential pensions implications at the outset. Good preparation can help you avoid legal and practical pitfalls. This post looks at two key cost issues; Part 2 will cover practical points to help you plan.
- DB and DB/DC schemes: could an employer debt be triggered?
While many defined benefit (DB) schemes are fully closed, some remain open to accrual or have an open defined contribution (DC) section. For schemes with more than one DB employer (an employer who employs a DB member, or did so in the past), a statutory debt could be triggered if one DB employer ceases to employ active members at a time when another DB employer continues to do so – even if those active members are only accruing DC benefits. A statutory debt can be significant (it’s effectively the departing employer’s share of the cost of securing all benefits with an insurance company) and could be counterproductive when companies are trying to reduce cost and preserve cash.
Where potentially affected employees are active members of a DB scheme or DC section of a hybrid scheme, it’s crucial to (a) identify the relevant employer for all in-scope employees and (b) check whether the employer will continue to have active members in the scheme after the redundancy exercise is carried out.
If that assessment identifies that a DB employer will cease to have active members in the DB scheme when another DB employer will continue to do so, you have two main options:
- consider whether any restructuring steps could be taken to ensure that the relevant employer continues to employ active members in the scheme after the redundancy exercise; or
- if that isn’t possible, consider whether the liability could be apportioned to another participating employer. There are a number of conditions to satisfy before an apportionment can be carried out and this normally requires significant lead time, as it will require detailed interaction between the scheme sponsor and the trustee (and notification to the Pensions Regulator).
- Will employees be entitled to enhanced pension benefits on redundancy?
Many DB schemes have enhanced benefits that are triggered on redundancy, and these can vary depending on whether the redundancy is compulsory or voluntary. Check the rules carefully to see what benefits might be triggered and in which circumstances – and whether there is an immediate cost to the company to fund the enhanced benefit.
Mistakes in this area are a common source of complaints to the Pensions Ombudsman, so you may need to seek legal advice on the interpretation of the scheme rules and you should ensure that the position is reflected accurately as part of any announcements or termination offers, to avoid windfalls/tax consequences for individuals.
Redundancy exercises can be complex and pensions issues can make them more so, but proper planning can help you minimise any adverse consequences. Look out for Part 2 of this blog post, covering other practical and technical pointers to successful management of a tricky process.
For further insights on restructurings from our colleagues in A&O’s Employment team, click here.
Jessica Kerslake is Counsel at Allen & Overy LLP.