The pandemic has pushed many employers to request deferral of their contributions. Kirsty Bartlett and Susan Oakley offer guidance for administering authorities.
As the country slowly unlocks, it is becoming evident that an alarming number of businesses are battling to stay afloat. The LGPS is not immune to the financial impact on employers. While councils have continued to operate throughout (in spite of the extraordinary pressures), many smaller admitted bodies are facing real difficulties.
The Pensions Regulator estimated in June that across private sector pension schemes approximately 10% of participating employers had asked to vary their pension contributions. Among LGPS funds we work with, the rate of requests has been significantly lower. They may rise in future, and administering authorities should now ask themselves how they will deal with an increased number of deferral requests.
There are a number of factors to consider when answering this. These include not only examining the legitimacy of any request, but also whether agreeing to deferral is permitted by the LGPS regulations, and acting in line with the ever-evolving guidance issued by the Pensions Regulator.
What is permitted by law?
Stepping back to basics, there is flexibility within the LGPS regulations to vary an employer’s contributions to a fund. Administering authorities can determine (and vary) payment dates for contributions, as long as they do not fall more than twelve months apart. Importantly, all contributions due within each year—covered by a rates and adjustments certificate—must be paid in full by the last day of the year covered by the certificate. In certain circumstances, the LGPS regulations also permit interest to be charged on deferred payments.
So, an administering authority can agree that deficit contributions can be frozen or deferred, but only on the basis that any outstanding contributions must be repaid by the end of the year covered by the current rates and adjustment certificate: 31 March, 2021 for the current year. While useful to help alleviate short-term cash flow issues, this obviously can’t be used as a longer-term measure for struggling employers in the LGPS.
Putting a formal policy in place can help administering authorities to deal with any requests fairly, consistently and quickly in what may be a time of acute pressure for the employer. A policy should explain the circumstances in which deferral may be permitted, the information an employer would be expected to provide, what deferral periods the administering authority will agree to and whether there will be additional charges (including interest).
What does the Pensions Regulator say?
The Pensions Regulator has issued guidance to private sector pension scheme trustees whose employers are in distress due to the pandemic. While not directly applicable to the LGPS, administering authorities should take account of this when considering requests from participating employers.
Briefly, the Pensions Regulator expects an informed decision to be made before any agreement to vary deficit contributions is made. It recognises that trustees (administering authorities in the LGPS) can properly agree to a deferral of contributions where they are given sufficient information to understand the employer’s position and remain comfortable that pensions obligations are dealt with fairly when compared to other stakeholders. Contributions should restart as soon as the employer is able to make payment, with a plan in place for this at the outset.
The Pensions Regulator still expects the usual reporting processes to be followed, including reporting any material failures to pay contributions. However, the Pensions Regulator has also announced an easement on certain reporting obligations due to the pandemic. An extension for reporting late payment of contributions remains in place until September, allowing 150 days instead of the usual 90 to report late payments. If an agreement is reached with an employer to defer contributions, then there should be no requirement to report this as a late payment until the relevant period of time has passed after the new, revised payment date.
Practical tips
The global economic recession arising from the pandemic is predicted to last longer than first imagined, and we do not expect that these requests will dry up any time soon. So, here are some practical tips to consider when a request to defer deficit contributions is made by an employer in distress:
Ensure sufficient due diligence is conducted to allow an informed decision about whether to agree to the request. This should be documented in writing. An employer in genuine need should be willing to provide any information reasonably requested by the administering authority to demonstrate their financial position and that the pension fund is not being treated unfavourably compared with the other stakeholders.
If appropriate, an updated rates and adjustment certificate should be issued to reflect the new agreed payment dates. This will also ensure clarity should a dispute about payment amounts and dates arise further down the line. However, a new certificate may not be necessary for short-term deferrals if the current certificate simply states the aggregate annual contribution amount.
If an employer fails to make a contribution without the agreement of their administering authority, then the usual reminder and recovery process should be followed. Consider also whether the failure to pay is material and should be reported to the Pensions Regulator (bearing in mind the presently relaxed timescales).
If in doubt…,
The pandemic has had a significant impact on the day-to-day operation of LGPS funds and, in many cases, on investments and funding levels. Individual employers are also feeling the impact, some acutely. Where employers ask for this impact to be reflected in their funding commitments, the LGPS regulations enable administering authorities to provide flexibility where appropriate. The Pensions Regulator’s guidance suggests how this may be assessed.
Administering authorities who anticipate an increase in such requests should consider adopting a formal policy to help employers understand what assistance may be available and how the administering authority would treat a request to vary contributions.
Kirsty Bartlett is a partner and Susan Oakley an associate at Squire Patton Boggs.
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