18 August 2020 - Post by:Jessica Kerslake
This is the second part of our look at the pensions pitfalls that can trip up employers and trustees when there are redundancies on the horizon. To read more about two major cost issues, see Part 1 – or read on for some practical points to help shape your preparation.
Can employees sacrifice any termination payment into the pension scheme?
I regularly get asked whether an employee can sacrifice a termination payment into their pension scheme. This is possible in theory but in practice the answer is ‘it depends’. On what? Things like:
- the scheme rules;
- the type of payment (most termination payments can be sacrificed into a pension scheme but there are exceptions to this, in particular pay in lieu of notice and the initial £30,000 termination payment that can usually be paid directly to employees tax-free);
- timing (for example, the sacrifice must occur before the employee becomes entitled to it).
This is an area where good communications are key – in particular, it’s a good idea to remind members to take advice on the potential implications for their annual and lifetime allowance.
Dovetail the offer with the rules
It may be the case that an employer doesn’t intend to trigger unreduced pension entitlements – but it’s the wording of the scheme rules that will determine the circumstances that trigger an entitlement to benefit, and the trustees must operate according to those rules. It’s vital to ensure that any offer works in a way that’s consistent with the rules.
What if health is an issue?
Extra care is needed if an employee who is being considered for redundancy also has health problems. Is he or she leaving due to redundancy or incapacity? In addition, a redundancy exercise may give rise to a higher level of ill-health applications than usual, so trustees may need to streamline processes (for example by delegating to a committee) to ensure that they can process applications within an appropriate timeframe. The period required for redundancy consultation may help with timing.
Other practical tips
Check for any contractual or discretionary redundancy terms, or established custom and practice on redundancy, as well as any special terms for particular categories of scheme member.
There is generally no obligation to explain the implications of retiring with or without consent – this should be clear from the scheme booklet and the rules – but anything you do say must be accurate, especially in a context where members are taking important life decisions based on that information. Make sure that all announcements and discussions are correct and clear in their description of any pension rights.
And finally – you may be expecting me to say this but it’s true: good legal advice ahead of time can save you a lot of time, money and anxiety!
For further insights on restructurings from our colleagues in A&O’s Employment team, click here.
Jessica Kerslake is Counsel at Allen & Overy LLP.