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Looking beyond the UK furlough scheme - considerations on redundancy in the energy sector

  • United Kingdom
  • Pensions
  • Energy and infrastructure

28-04-2021

 

When the Government’s furlough scheme draws to a close at the end of September 2021, many employers in the energy sector will face the harsh economic reality of fighting to keep their businesses afloat in these unprecedented times. Redundancies may be inevitable. Careful planning will be key both in ensuring a smooth transition for the affected employees and to avoid unexpected pension costs resulting from the redundancies.

Minimising impact on staff

Before embarking on any redundancy process, employers should consider whether it is appropriate to ask for volunteers for redundancy in the first instance, or to consider alternative working patterns for all or some of their workforce. This may negate the need for some or all redundancies.

If redundancies are necessary, it is essential that employers follow the statutory process and consult any recognised trade unions or representative groups.

Employers should also contemplate the likely reaction of the workforce to the redundancy exercise and consider how best to maintain ‘business as usual’ during this unsettling period. It is important to think about the whole of the workforce: employees who are unaffected by the redundancy exercise (and / or those who will survive any redundancy consultation exercise) will still be feeling vulnerable and should be reassured of their importance to the business and its survival.

Engaging independent consultants to conduct the redundancy consultation can have real benefits, particularly where managers / HR teams are affected personally by the redundancy exercise.

Employers should also consider whether an improvement to the statutory redundancy payment is possible (always considering the need for a fair and non-discriminatory approach). Although this would demand more upfront costs, it creates an opportunity to present more positive messages, minimises negative publicity and reputational risk for the business and provides reassurance for those employees who remain.

In our experience, many employers enlist the services of outplacement consultants to assist affected employees secure alternative employment. In addition, those employers that operate employee assistance programmes often find these can be used to good effect in providing financial and emotional support to affected staff. To the extent such services are not available, a reminder of local organisations that may be able to help, is likely to be welcomed.

Whilst none of these things are legally necessary, many employers will wish to go the extra mile, particularly given the ongoing challenging economic environment.

Action: Before embarking on a redundancy exercise, work with your legal adviser to ensure your process will meet statutory requirements. Consider whether the process would be better handled by independent consultants and think about using strategies that smooth (as far as possible) any adverse impacts of the exercise on your workforce and the business.

Pension enhancements

Many employers in the energy sector still have open defined benefit pension plans which offer immediate enhanced pension rights on redundancy (provided the member is over 55, sometimes 50). Often, these pensions are paid unreduced despite being paid early. Sometimes, the members’ pensionable service is increased by either a fixed amount (i.e. five or 10 years) or prospectively, to take into account the pensionable service the member would have achieved if they had remained in employment up to normal retirement date.

This can be extremely expensive. Employers should seek legal advice on whether such enhanced rights could be triggered by redundancies and obtain actuarial input to determine the consequent funding strain. Trustees are likely to require a cash injection into the plan to pay for such enhancements, particularly for immediate pensions.

Furthermore, any redundancy exercise will naturally raise concerns for trustees regarding the strength of covenant that will be offered to the pension plan in the short and medium term. Trustees may need to consider whether recovery plans and any security or guarantees need revisiting. Where the pension plan is still open to accrual, the company will also need to ensure that the redundancy arrangements won’t inadvertently trigger a section 75 debt on the employer.

Action: At the outset of any redundancy exercise, a company with defined benefit pension arrangements should seek legal advice on the potential effects of a proposed redundancy exercise on pension benefits. The company should also look to engage with the trustees early on in the process.

Pensions promises under TUPE

Companies should also identify whether any of the employees at risk of redundancy have enhanced pension redundancy rights arising from historic transfers. Generally, rights under an occupational pension plan do not pass on a business transfer under the Transfer of Undertakings (Protection of Employment) Regulations (commonly known as TUPE).

However, two European Court of Justice cases (known respectively as Beckmann and Martin) confirmed that the TUPE exemption does not apply to pension rights payable on early retirement, such as pensions paid on redundancy. These obligations can result from business acquisitions or from contracting with the public sector on outsourcing agreements.

Occasionally, employment contracts may also contain additional enhanced pension rights on redundancy.

Action: Consider whether any of the employees at risk of redundancy could have an entitlement to additional pensions rights, either contractually or under TUPE.

Discrimination issues

Excluding employees from a redundancy exercise simply because enhancements under the pension plan would be too costly could be a high-risk strategy leading to complaints of discrimination, particularly on the grounds of age. However, certain factors closely connected to pensions, such as length of service, may be legitimately taken into account in redundancy decisions if correctly justified.

Action: Seek legal advice early to ensure any pensions considerations are appropriately and fairly factored into the redundancy process.

Next steps

Redundancies may very well become part of the “new normal” in the post COVID-19 world. The impact on employees and the business can be minimised by careful planning and embracing considerate and often low-cost strategies. The complex and costly pensions aspects of redundancy exercises should be addressed in advance of any programme. Trustees of relevant pension plans will also need to understand the effect of any such redundancy exercises and the wider employer covenant afforded to the plan in the longer term.

In addition, Konexo UK, a Division of Eversheds Sutherland (International) LLP, has a HR consulting offering with more than 70 senior HR consultants to draw on. Our HR consultants are experts in their field and are able to provide both strategic and operational support to clients managing redundancy and other restructuring exercises.