As part of the BKK practical help series, the fourth instalment highlights the economic implications and the impact already evident in pension investments and the measures that employers and trustees can take to safeguard their assets as much as possible in a very uncertain economic climate. Also, the BKK financial advisor team led by Director Richard Fowler have added commentary on the importance of personal portfolio diversification and safeguarding your cash. The core message from Richard is “don’t panic, selling is the worst thing you can do, remain focussed on your long-term goals ”.
We are here to help and really want to engage with and help you at this time. Please continue to speak with us.
What if employees who are members of a pension scheme are absent from work?
- Absenteeism may be due to reduced hours, temporary lay-off, salaries reduced, statutory leave, employers business being temporarily closed, employees contracting COVID-19, self-isolation
- The issue of contributions and whether they should continue is an immediate one in a DC scheme, whereas in a DB scheme the issue relates to whether the member is still in pensionable service
| What if employees who are members of a pension scheme are absent from work? | ||
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Types of pension schemes
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The treatment of employees
Under Defined Contribution (DC) scheme Both member and employer contribution rules should be reviewed to determine if they contain flexibility regarding payments to employer contributions where the member is unpaid or is not also making contributions. Sometimes the employer will be given discretion in relation to contributions in those circumstances (e.g. in a matching situation, where member contributions ceased so too would the employer contributions) |
The treatment of employees
Under Defined Benefit (DB) Schemes The issues for DB schemes in relation to employee contributions are the same as set out for DC schemes. In contrast, in a DB scheme, the rate of employer contribution is determined by the most recent (usually three yearly) actuarial valuation. However, from the member’s perspective, the question is whether there is ongoing accrual of benefit and broadly this will depend on whether a member remains in pensionable service or not |
| Pensions implications where a member is being paid while on COVID-19 related leave? | Generally where an employee is out of work but in receipt of full pay, both employer and member contributions to their pension scheme should continue as normal | If the member is on fully paid leave then it is likely that they will also remain in pensionable service and they continue to accrue benefit in the normal way. |
Pension implications where a member is NOT being paid while on COVID-19 related leave? |
For non-payment of salary, pension contributions continuing will depend on (a) the scheme in question’s contribution rules and (b) tax and practical considerations | For non-payment of salary, whether or not the member is in pensionable service will likely depend on whether or not they are still in the employment of their employer.
If the member is partly paid, then there are two options (a) the member may be treated as either in partial pensionable service at the full time employment salary or (b) on reduced pay for full time employment service |
Where a member is partly paid during temporary leave?
Where income remains from the employment to which the scheme relates it will be possible for the member to make tax relief employee contributions but schemes should be reviewed to determine if contributions continue in full or whether contributions as a percentage of pay could be done, part-time employees rules may also come into effect here.
Tax considerations
Income tax relief is allowable only against income from an employment to which the scheme relates, therefore if an employee is not being paid it is not possible for the tax relieved employee contributions to be made.
Temporary absence rules
Most schemes include rules around temporary absences laying out whether contributions to the scheme continue wholly, partially or are suspended. These rules will also set a time limits on length of absence while remaining a member of the scheme.
Can an employer deduct a pension contribution from a Temporary Wage Subsidy payment to an employee?
No. The employer must pay to the employee “an additional amount equivalent to the wage subsidy”, which means the subsidy amount must be paid to the employee in full. The purpose of the subsidy is to ensure the employer/employee relationship is maintained and to ensure a minimum amount is paid to employees during a time of national and worldwide emergency
Employer PRSA Scheme – Can employer contributions be stopped?
Where the employees continue to be paid (full or reduced income), employers need to consider their obligations under any other agreements in place e.g. contract of employment, before suspending employer pension contributions into the PRSA. When stopping contribution employers need to notify all impacted employees. Employee contributions can also be stopped at any time.
Important reminder
Any occupational pension or PRSA contributions deducted from employees’ pay must be remitted to the scheme or PRSA provider within 21 days following the end of every month in which they became payable the statutory deadlines. Failure to do so is a criminal offence and the Pensions Authority will pursue such cases actively
What is an Annuity?
An Annuity is a simple retirement payment option that guarantees to pay you a particular amount every month throughout your life in retirement.
Increased demand for Annuities?
· The demand for bonds has increased due to falling of stock markets but, much like dry goods and toilet paper, the products are vanishing of the shelves which is causing added pressures for individuals approaching retirement who are interested in purchasing an annuity.
· This in turn has driven yields lower resulting the cost of purchasing an annuity as a secure retirement income increases
Checklist for all employers/trustees and pension scheme providers to mitigate against possible financial consequences ?
- Is it possible to temporarily cease the payments of pension contributions during this uncertain period?
- Are all employment changes being introduced being reflected in pension contributions ?
- Does your business continuity plan include actions that should be taken if certain events arise that would affect the running of schemes?
- Assess all your options should cash flows weaken
- Do you need to look at extending timelines to meet your strategic objectives?
- Are your scheme investments insulated against the full financial effects of the virus?
- Pension saving is long term with most saving between 30 and 50 years and while it is advisable to closely watch current events, we should all remain focused on the long-term objective
Why diversification is important?
- Diversification means lowering your risk by spreading money across and within different asset classes, such as cash, bonds, property, equities and alternatives
It’s one of the best ways to weather market ups and downs and maintain the potential for growth
A portfolio fully invested in shares is likely to have done well over the last 10 years but suffered this year
Bonds have sheltered investors better than shares this year, and some have risen in value, but they typically underperform shares over longer periods of time
At times like this, for those taking a long term view it is important to ensure that you have a well-diversified multi asset portfolio that is aligned to your tolerance to investment risk. Portfolio diversification:
- Different types of investments such as Equities, Property, and Alternatives such as Currency and Commodities
- Different investment strategies
- Different territories such as Europe, Asia, emerging markets
- Different fund managers
- Passive and actively managed investment strategies
For example, let see how diversification works by taking a look at the Zurich Life Prisma 4 Fund, which is a balanced risk actively managed multi-asset portfolio with a current asset weighting of a circa 52% equities, 31% bonds, 11% alternatives, 5% property and 5 % in cash. Over the last 3 months, the Prisma 4 Multi Assets Fund has returned -14.33% compared to the MSCI World Index, which has a weighting in equities of 100%, that has returned -21.88% over the same period.
How do I safeguard my cash?
- In order to remove any worry and protect your hard-earned deposits, the simplest action to take is to diversify your cash deposits between different banks.
- The Deposit Guarantee Scheme (DSG), covers Eligible depositors in the event of a bank, building society and or credit union authorized by the Central Bank being unable to pay deposits. The DGS protects deposits up to €100,000 per person per institution and covers current accounts, deposit accounts, share accounts in banks, building societies and credit unions. For example, a married couple have €400k cash savings all held in a joint AIB deposit account. If the AIB were to collapse, €200k of their deposits would be covered under the DGS and the remaining balance would be at risk. However, had they held 50% of their savings (€200k) in another bank in Ireland that’s covered under the Deposit Guaranteed Scheme, such as with the Bank of Ireland, Permanent TSB, KBC, or Ulster Bank, all their deposits would be fully covered under the DSG Scheme.
- There is also to option to invest in State Savings which are 100% protected by the state and there is no upper limit of the amount protected, plus there is no expiry or end date for this protection. State Savings Products for consideration which are readily accessible include:-
State Savings Prize Bonds
- Each Prize Bond is in every weekly draw with the chance to win a prize
- Minimum purchase €25 (4 Prize Bonds) up to maximum €250,000 (40,000 Prize Bonds) per individual or €500,000 (80,000 Prize Bonds) jointly
- When you need your cash, you can withdraw your money with 7 days notice
- Prize Bonds never expire and may be held for as long as you choose
- You can cash your Prize Bonds in at any time after the minimum holding period of 90 days and you will receive the full face value on your Prize Bonds within 7 working days
- Prize Bonds are entered into our weekly draw for thousands of tax free cash prizes up to €50,000 and a €1 million prize twice a year
State Savings Variable Rate Deposit Account – Book based
- Post Office Savings Bank Deposit Accounts are subject to maximum limit of € 250,000 per individual
- Up to €3,000 daily limit available on demand at any Post Office
- Over €3,000 limit is available subject to 7 days notice
We are here to help and really want to engage with and help you at this time. Please continue to speak with us.