Have employer contributions ceased?
First, and probably most importantly, is the employer sponsor continuing to make contributions to the fund or sub-plan? If the employer’s contributions have ceased, it is time to consider the effect will this have on benefits and/or the viability of the plan. In addition, you’ll probably need to check the plan rules to determine whether an extended cessation of contributions might give rise to a deemed termination of the fund or sub-plan.
Has the plan’s solvency deteriorated?
If an employer’s contributions are continuing, the next thing to consider is the plan’s solvency. If the fund or sub-plan was in surplus not long ago, it’s possible that the pandemic has wiped that surplus away (e.g., as a result of the recent drop in asset values). In these circumstances, it might well be time to consider getting updated actuarial advice. If the plan’s solvency has in fact dropped (e.g., into a small deficit), it might be necessary to seek further employer contributions or at least to seek a renewal of the employer’s existing contribution commitments. If the fund or sub-plan has reached ‘technical insolvency’ (a term defined in the SIS Regs), the plan’s actuary should be consulted to determine the appropriate funding program to bring the plan back to life.
Has there been a large-scale redundancy program?
The next thing to consider is whether Covid-19 has forced the employer to engage in a large-scale redundancy program. If so, this could trigger mass entitlements to retrenchment benefits which might be more generous than mere leaving service benefits. How are those mass retrenchment benefits going to be financed? Sometimes, employers need to make additional (one-off) contributions to finance retrenchment benefits. If the employer can’t afford to make those additional contributions, this could lead to an early termination of the plan. In that event, it’ll be necessary to check the plan rules to see what they provide in relation to winding-up (which, usually, will involve a scheme for paying out certain benefits, such as pension benefits, in priority to others).
What effect might unpaid leave or pay cuts have on benefits?
If members have been forced to take unpaid leave or if they’ve been ‘stood down’, it’ll be necessary to check the relevant plan rules to determine the effect this might have on their benefits. Some rules might provide that periods on ‘approved leave’ should be taken into account in calculating benefits. Other rules might provide that periods of ‘absence from active employment’ should not be taken into account. If the latter, this might have a significant impact on members currently nearing retirement age. Similarly, if members have been forced to take significant pay cuts, it’ll again be necessary to check the relevant plan rules to determine the effect this might have on benefits. For instance, some plan rules might provide that final benefits depend on a member’s salary averaged over the last two or three years of employment. If the member is near retirement and their final average salary has been cut significantly, this might well have an impact on their final benefit. However, other rules might provide that temporary reductions in salary during the last year or two of employment should not affect benefits. In the end, it all depends on the particular plan rules.
Compassionate releases
While a member’s defined benefit interest is excluded from being the subject of a Covid-19 compassionate grounds release, this doesn’t necessarily mean that the member’s accumulation component (or voluntary account) can’t be drawn on. Also, a member’s defined benefit interest is not excluded from being the subject of an ordinary compassionate grounds release or the subject of a financial hardship release, though of course the plan rules can prevent them. Again, it’ll be necessary to check the rules carefully.
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