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Pension schemes and COVID

11 Dec 2020 / Pensions Print

Can’t take it with you

The pandemic has brought pension schemes into the spotlight, particularly death-in-service benefits and the impact that COVID-19 has had on them.

It is not uncommon for pension schemes to provide benefits that are payable when a member dies. Typically, these benefits consist of lump-sum payments or pensions that are payable to the member’s spouse or other dependants.

Death-in-service benefits had taken something of a back seat to concerns relating to the employer contribution, regulatory guidance, and the State-pension age debate.

However, death benefits have come into sharp focus during the past few months, as employers and trustees wrestle with the impact of the COVID-19 pandemic on pension schemes.

Killed by death

Many employers provide a death-in-service (DIS) benefit to employees through full or partial pension-scheme membership. The DIS benefit will be payable to a member’s dependants in the event of his/her death, and it is usually insured with a life company.

Where the insured member dies in service before their normal retirement age, a lump sum not exceeding the greater of €6,350 or four times the deceased member’s final remuneration may be provided to their dependents.

In addition to the lump sum, an approved scheme may also provide a pension to a spouse, civil partner or specified dependant. The pension payable can be an amount not exceeding the maximum aggregate pension that would have been approved for the member if they had retired on ill-health grounds on the date of death.

A spouse or civil partner’s (but not a dependant’s) pension may be deferred instead of being taken immediately.

In recent years, we have seen a trend whereby employers are offering employees the opportunity to trade a spousal or dependant’s pension in exchange for a higher lump-sum payment. Often the lump sum offered is in excess of ten times salary.

Exercises such as these operate as a risk-reduction opportunity for employers. This is because lump sums are more predictable and cheaper to provide than spousal or dependants’ pensions, which are more expensive and riskier due to their unknown cost and duration of payment.

A higher lump-sum payment may be more attractive to some employees, but would also result in a payment of tax, as the approved Revenue limit for the payment will be breached.

Gimme shelter

The manner in which the pandemic exploded over the course of a couple of weeks meant that procedures had to be adopted and protocols reviewed to ensure that benefits could continue to be assessed and paid.

Scheme administrators had to ensure that staff were well briefed on up-to-date DIS procedures. These procedures had to be amended quickly and often to maintain compliance with the ever-developing situation. Difficulties arose with access to facilities and documentation.

Many schemes had set protocols that needed to be met, and the circumstances created by the pandemic had the potential to result in delays to payments. For example, on receiving notification of the death of a member, scheme administrators should immediately check to see if the member provided a letter of wishes or nomination form.

The deceased member’s death certificate should also be requested from the solicitor acting for the deceased’s estate. It should also be quickly established whether or not there is a pension adjustment order on record for the deceased.

COVID-19 created obvious difficulties in completing each of these tasks, and mechanisms whereby they could be accomplished in a timely basis needed to be designed.

Just got paid

An immediate concern was whether the pandemic might result in payments being refused due to the wording of the underlying insurance policies. This was especially the case where, in the opening weeks of the health emergency, the likely death rate was unknown and represented a huge risk to insurance companies.

Where a scheme’s DIS benefit is provided through an insurance policy, the trustees have to check to see whether the policy is affected by a pandemic-type event and whether it contains an ‘event-limit’ clause, as an event limit will cap the total losses payable under a policy.

An event limit clause is typically expressed either on a per-occurrence basis or on an aggregate basis.

An immediate concern for pension-scheme trustees was whether such clauses might result in the failure of the insurance companies to pay the DIS benefits. An immediate action required the trustees to obtain clarification from insurers and confirm if DIS benefits were affected.

We have not seen any DIS payments being refused as a direct result of the pandemic. The outcome might have been different if the pandemic had resulted in a higher death rate which, thankfully, has not been the case to date.

It will be interesting to see how the insurers amend their policy documentation in the coming months and years to take account of their experience of the pandemic, and lessons they may have learned. Employers and trustees will need to become aware of any such changes and communicate these to employees, as appropriate.

Double trouble

The manner in which letters of wishes are stored and the contents recorded should be reviewed. Consideration needs to be given as to whether they are stored securely and in a way that facilitates access to the relevant individuals.

It also needs to be determined where the data is recorded, whether as hard-copy documentation or retained electronically. Letters of wishes should be reviewed on a regular basis to ensure that they accurately reflect the wishes of the members. The employer should facilitate employees in this exercise.

COVID-19 exposed the difficulty in accessing hard-copy documentation and the need, where possible, for documentation to be stored electronically. It is important to retain original hard-copy documentation to prevent future disagreements, as scanned documentation is often of a lesser standard of legibility.

The pandemic also resulted in many trustee groups meeting on a more informal basis due to social-distancing requirements. It is of crucial importance that all considerations concerning the payment of a DIS payment are done on a formal basis and full minutes recorded. A decision of the trustees concerning a DIS payment that is done informally or without due consideration could be challenged by other potential beneficiaries.

Good times, bad times

COVID-19 resulted in employees being temporarily or permanently laid off from work. Employees who are permanently laid off are no longer entitled to DIS benefits, but more careful consideration needs to be given to employees who are affected by temporary arrangements.

Trustees should be apprised of relevant provisions in the scheme governing documentation in order to establish if DIS benefits remain payable for scheme members during periods of temporary absence or leave.

DIS provisions are typically found in the scheme rules, and the precise employment status of employees who are temporarily absent from work will need to be confirmed by the employer.

If employees are no longer covered for DIS benefits during such periods of leave, this should be clearly and quickly communicated to them so that the employees concerned can make alternative private arrangements should they so wish.

As well as dealing with the tragedy of the death of a family member, the dependents of a deceased employee will need to meet certain immediate costs, such as funeral expenses, and in many instances will face unforeseen financial upheaval.

It is in the interests of the scheme’s employer, trustees and administrators to establish the deceased member’s status at the date of death to ensure that his or her dependents are identified, and that the procedure is completed as quickly and as painlessly as possible.

Money

There are many pitfalls that exist when one considers the payment of DIS benefits. COVID-19 has exposed problems that need to be identified and solved by employers and pension-scheme trustees. As the period of initial panic passes, now is the time for all concerned to review how the payment of DIS benefits operate and what changes are required.

All parties need to be sure that the underlying benefit documentation is fit for purpose, and that all employees are fully aware of the benefits that they are entitled to, and how future pandemics may affect future benefit payments.

The beneficiaries must be at the heart of all decisions taken by trustees and employers. Failure to take appropriate decisions in a timely manner will only compound already difficult circumstances – and could also result in costly litigation at a later stage.

Read and print a PDF of this article here.

Stephen Gillick
Stephen Gillick is a partner in Mason Hayes & Curran and chair of the Law Society’s Pensions Subcommittee