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Coronavirus - The implications for pensions: the Wage Subsidy Scheme and suspension of contributions - Ireland

  • Ireland
  • General

09-04-2020

In this COVID-19 update, we look at two related pensions issues which we are receiving client queries on:

• the interaction between the new Temporary Wage Subsidy Scheme (the “Subsidy Scheme”) and pension arrangements; and

• the temporary cessation of pension contributions by employers and / or employees affected by the COVID-19 crisis.

The Subsidy Scheme

The Subsidy Scheme provides support to employers who have seen their business adversely impacted by the COVID-19 crisis. A detailed briefing published by our Employment Law team on the Subsidy Scheme can be found here.

At a high level, the Subsidy Scheme allows qualifying employers to claim a subsidy in respect of certain employees which is then paid to those employees. The subsidy payable is of up to 70% of the employee’s average net weekly pay (capped at either €350 or €410 depending on their average net weekly wage). No subsidy can be claimed in respect of employees with an annual gross salary of more than €76,000. A subsidy can be claimed whether an employee is working full time or reduced hours, or has been temporarily laid off but retained on payroll.

Employers are required to top-up employees’ wages, and must make “best efforts” to maintain the employees' net income as close as possible to normal net income.

The Subsidy Scheme does not subsidise employer pension contributions. While the UK equivalent (the Job Retention Scheme) varies in many ways from the Subsidy Scheme, it is notable that the UK scheme does include an allowance for employer pension contributions. This can be explained perhaps by the fact that auto-enrolment applies in the UK, and the refund which can be claimed is capped at the minimum employer contribution payable under auto-enrolment in respect of an employee.

Deduction of Employee Contributions

Any subsidy paid under the Subsidy Scheme must be paid to an employee without deduction. Revenue guidance has expressly confirmed that pension contributions cannot be deducted from the subsidy payment.

It follows that, to the extent that employee contributions remain payable to an arrangement, these may only be deducted from the top-up element coming from the employer. This can give rise to practical difficulties.  In particular, depending on the basis of calculation, the contribution due may exceed the amount of any top-up. This could be an issue where contributions are of a fixed amount (eg €100 per month), or are based on a percentage of an employee’s annual salary calculated at a particular date (eg 1 January each year), rather than based on pay received in a particular pay period.

There is also an argument that making deductions of employee contributions as normal (unless an employee wishes to do so) runs somewhat contrary to the intention or spirit of the Subsidy Scheme, ie maintaining, to the extent possible, the average net weekly income of an employee.

Accordingly, some employers going into the Subsidy Scheme (and the trustees of their pension schemes) are exploring the feasibility of suspending, or giving employees the option to suspend, employee contributions for the duration of the Subsidy Scheme.

Suspending or reducing pension contributions

As outlined above, the deduction of employee contributions where an employer is participating in the Subsidy Scheme gives rise to particular difficulties.  There may also be reasons why an employer, whether or not they are participating in the Subsidy Scheme, may wish to explore the feasibility of reducing or suspending employer pension contributions. In particular:

• employers may consider that they will not have the funds available to pay contributions as they fall due (risking a potential breach of section 58A of the Pensions Act 1990); and

• suspending contributions may facilitate the employer paying additional amounts to employees than would otherwise be possible.

Most pension schemes will contain some provisions permitting the suspension or reduction of contributions. However, the formalities for effecting such changes will vary from scheme to scheme and may require, for example, the giving of notice by a party and / or a requirement to obtain the consent or agreement of sponsors, trustees or members. Typically, provisions will also be included allowing for arrears to be made up following the end of any period of reduction or suspension.

It is important that any formalities specified are followed. Where they are not there is the risk that contribution obligations will remain, and employers risk breaching the requirements of section 58A of the Pensions Act if those contributions are not paid in accordance with normal statutory timelines.

Where no powers of suspension or reduction are present, it may be possible (though perhaps challenging in the circumstances) to:

• amend the rules of the scheme to introduce such provisions; or

• agree changes in contributions by way of extrinsic contract with individual employees.

Where contributions are being suspended it is also important to consider whether this will have additional implications. Two particular points to bear in mind are:

• whether the fact that contributions are suspended (or the fact that employees are receiving reduced pay or have been temporarily laid off) will impact on the provision of any risk benefits provided (whether under the terms of the scheme or any insurance policy covering those benefits); and

• whether the suspension of contributions could give to preserved benefit entitlements or a requirement for the employer to provide affected employees with access to a personal retirement savings account (PRSA).

Conclusion

The COVID-19 crisis has resulted in unique challenges for all elements of society, with the “normal way” of doing so many things put on hold.  The pensions industry is not immune to having to adapt to these new circumstances.  The challenge for sponsors and trustees (and their advisers) is to find workable and pragmatic solutions to issues faced within the confines of their statutory and scheme specific obligations.

For support on legal issues facing your business in light of the outbreak of Covid-19, please visit our Coronavirus hub to get our latest information and guidance.

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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