What if we can't pay company pensions for employees and employers contributions?
This is automatically a sign of insolvency. Automatic enrolment commenced in 2012-14 and requires all employers to offer employees access to a pension savings product. Whilst clearly good news for employees it is a cost to the employer / company. It can have a cashflow impact too.
If you cannot meet the payments the company is insolvent under the Insolvency Act 1986 and you are, as a director at risk of penalties and fines for failure to make payments and falsely report a declaration of compliance. This is clearly very serious for you and the company.
So what can you do if you’re unable to pay your company pension contributions, and what are the potential consequences for your business?
Employers’ Duties Under Auto Enrolment
The employer (company) must pay your employer and employee contributions to the pension scheme accurately and on time every month. The pension trustees (companies that operate pension schemes like this) are responsible for ensuring this happens, and they will write to you if arrears build up.
What are the consequences of not paying your company pensions?
Depending on the length of time of non-payment the pension trustees can report you to The Pensions Regulator (TPR), the body that regulates auto enrolment. They could demand immediate payment of the outstanding amounts, which would further damage your company’s cashflow. So the rule of thumb is do not fall behind with contributions. During COVID 19 lockdowns, most of the employees’ wages are supported by furlough, but the employer must still make the employees and employers pension contributions out of what is often non existent cashflow.
So if more than 2 months of arrears build up The Pensions Regulator has a number of enforcement options open to them, including:
If an employer has not met these legal duties, you may first get a warning letter with a deadline for you to meet your duties from the Pensions Regulator (different organisation than the pensions trustees) You should then call the phone number on your letter speak to the Pensions Regulator and they will tell you what you need to do to meet your legal duties. If you don’t meet your duties within the deadline you may be sent a statutory notice.
- Statutory notices can be issued to inform employers of any outstanding contributions due and give you a deadline for repayment, as well as a note of the interest that will be added.
- Penalty notices: The Pensions Regulator may issue fixed and rising penalty notices if the employer seems to ignore the statutory notices (DON’T IGNORE THESE!). Fixed penalties are circa £400, with daily penalty amounts added depending on the number of staff employed - for the largest employers this can be up to £10,000 per day. A civil penalty of up to £50,000 can also be issued to businesses for non-payment of pension contributions.
- Commence civil action through the court- The Pensions Regulator may take civil court action to enforce penalties which may result in directors being guilty of non compliance.
So, as you can see, the risks of not paying your company pensions are severe.
What can you do if the cashflow does not support repayment?
Because now the company is clearly insolvent on the cashflow test (LINK TO TESTS) and the directors must now maximise the interest of all creditors directors should TALK TO US now about the solutions - which could include proposing a company voluntary arrangement (CVA) LINK to all unsecured creditors. See our Experts Guide to CVAs to learn more.
Alternatively if the company or business is no longer viable and you do not wish to rescue it using a CVA or a pre pack administration (LINK) then the most appropriate option is to commence the process of putting the company into creditors voluntary liquidation (LINK TO GUIDE). This will bring the affairs of the company to an orderly close an remove your reporting and compliance obligations as a director.
Pre pack or trading administrations are described here LINK - in most cases business assets are sold at auction with the proceeds going to repay creditors as much as possible. The company then enters liquidation or is dissolved LINK
Summary: if the company is finding it difficult to keep up employer contributions, talk to us now FREE on 0800 9700539 or email us at firstname.lastname@example.org
Worried about poor cashflow? Feel you have got into a bit of a mess? Covid-19?, How to pay wages on pay day? For reassuring advice on a range of issues download our free Ultimate Guide For Worried Directors today. Or just call us on 0800 9700539
Please note that the guide includes updates due to Covid-19 For instance there have been some changes to insolvency legislation that limits creditors actions. A new 20 day moratorium for distressed businesses has also been introduced.