What are the special considerations for DB schemes?
- Before any agreed reduction in wages, actual changes to earning patterns (loss of overtime, for example) may impact the pensionable salary as defined under the scheme rules, with knock-on effects to a number of benefit calculations, such as death in service benefits.
- Contractual changes to member salaries may adversely impact accrued benefits as the final salary figure may be reduced to a greater or lesser extent depending on the duration of furlough and the severity of any reductions in wage, and hence reductions may be difficult to agree with staff.
- Reducing employer contributions will be subject to a number of the same considerations applicable to a DC scheme listed above. There will also be a need to change the rules and interact with the trustees, although it may be possible to override the rules with a direct contractual agreement with members.
- Reducing employee contributions will also depend on the scheme rules, particularly as to whether there are any discretionary powers to suspend contributions, or pensionable service.
- The rules will need to be considered for any unexpected consequences of furlough: depending on the wording of the rules, furlough may or may not be considered a leave of absence and may or may not have the effect of terminating pensionable service. This could have far-reaching consequences.
- In particular, if the workforce’s pensionable service is inadvertently terminated as opposed to suspended in accordance with any relevant rule, this could trigger a statutory employer debt on an employer participating in a multi-employer scheme, if pensionable service continues for employees of other employers. This sort of issue is unlikely to be spotted until after the event, and therefore difficult to untangle. However, an employer should be able to take advantage of the “period of grace” provisions by notifying the trustees of its intention to re-admit employees to pensionable service within the next 12 months.
- Clearly the impact of the Coronavirus Job Retention Scheme on DB schemes is complex and legal advice should be sought before any changes are considered.
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