Herbert Smith Freehills outlines pension cost saving tips for employers

Herbert Smith and Freehills has outlined four pension cost saving steps for employers, as many firms look to reduce costs and preserve cash amid the ongoing coronavirus pandemic.

The firm highlighted that whilst the focus has primarily been on the scope for employers with defined benefit (DB) pension schemes to defer their deficit recovery pension contributions, there are a number of other steps, applicable to both DB and defined contribution (DC) schemes, that can reduce pension spend.

For instance, it emphasised that firms can also consider reducing pension contributions for those employees on furlough to the minimum automatic enrolment rates, without having to complete the usual 60 day process.

Equally, reducing future service pension contributions, whether on a temporary or permanent basis, was also highlighted as an area of consideration.

However, the firm clarified that if employers plan to reduce contributions for non-furloughed staff, they will need to consult with affected employees and employee representatives for a period of at least 60 days.

They will also need to make any necessary changes to individuals’ contracts of employment, in addition to notifying the scheme's trustees or provider, in order to confirm
whether contributions can be paid on the reduced basis, or whether, for example, an amendment would be required to scheme rules.

Closing DB schemes to future accrual altogether was also highlighted as a potential cost saving measure, although the firm acknowledged that most DB schemes have already done so.

It clarified that employers considering this option would however, once again, need to conduct a 60 day consultation with affected employees and employee representatives.

Scheme trustees would also need to be notified in order to amend scheme rules, with a trustee agreement potentially also required.

Herbert Smith Freehills pension partner, Rachel Pinto, added: “Employers will also need to take legal advice on whether or not members’ final salary link will need to be retained even where the scheme is closed to future accrual.

"This will depend on the nature of any restrictions on the use of the scheme’s amendment power."

Postponing auto-enrolment (AE) and re-enrolment were also cited as potential cost saving steps, with the firm clarifying that while employers AE duties continue to apply, employers can postpone the obligation to automatically enrol an individual who becomes eligible for up to three months.

Firms can also defer triennial automatic re-enrolment dates by up to three months after the third anniversary of their previous enrolment date.

In both cases, the employer would not be required to pay the employer contributions for this period.

The law firm also stressed the need to engage with members, who will also be facing financial pressures.

It urged schemes and employers to consider introducing greater flexibility for individuals to reduce their own pension contributions, above the minimum AE levels, stating that this would enable individuals to reduce their monthly outgoings whilst continuing to build up retirement savings.

The firm clarified however, that members do not have the option of temporarily suspending their contributions.

Though Pinto also stressed that “any steps an employer can take to ease the financial strain" on workers, whilst enabling them to continue saving something for their retirement, “is worth considering”.

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