The Pensions Regulator (the Regulator) has published extensive guidance for employers and trustees during Covid-19. The most recent guidance, which focuses on auto-enrolment and pension contributions, gives some much needed clarity particularly in terms of how pension obligations apply for furloughed staff. The key points for employers are summarised in the Q&A below.
Do employers have to continue contributing?
Auto-enrolment (AE) and contribution duties continue as normal, including re-enrolment and re-declaration duties. This is the case whether your staff are still working or being furloughed under the Coronavirus Job Retention Scheme (CJRS). However, employers may be able to take advantage of some of the help and "easements" introduced (see below).
Can employers recover employer pension contributions from the CJRS and if so how?
As well as being able to claim the lower of 80% of a furloughed employee's wages and £2,500 per month, employers can also claim the statutory minimum employer pension contributions on those wages under the CJRS.
The Regulator has confirmed the statutory minimum contribution, regardless of the type of scheme, will be 3% of "qualifying earnings" on the amount of wages received. For the tax year 2020/21, qualifying earnings are total earnings before tax between £6,240 and £50,000.
Total earnings for this purpose include:
- Bonuses and commission
- Statutory sick pay
- Statutory maternity, paternity or adoption pay
It is common for employers to calculate their pension contributions on a basis other than banded qualifying earnings. For example, contributions are often based on basic salary from the first penny of earnings and are often more than 3% of qualifying earnings. If this is the case, the Regulator has confirmed that employers must continue to calculate and pay their contributions in the usual way. For furloughed staff, the employer will, in addition, need to calculate what 3% of their qualifying earnings is, as part of the process for making the pensions related claim under the CJRS.
Do employers have to pay more than the auto-enrolment minimum for furloughed staff?
Many employers contribute more than the statutory minimum pension contributions. If these employers have a defined contribution scheme they may be able to reduce their contributions to the statutory minimum received under the CJRS in respect of furloughed staff. However, a reduction to pension contributions could lead to breach of contract claims and would ordinarily require consultation for a minimum of 60 days under the pensions "listed changes" regulations.
To reduce the risks, employers should explain the proposed pension position during furlough carefully and clearly to staff and consult for as much time as is possible with staff and their representatives. The Regulator has said this includes providing information on the intended change and the effects on the scheme and furloughed staff. Ideally employers should get agreement from staff as part of the overall furlough arrangement. Provided these steps have been taken, the changes only impact furloughed staff and the employers pay the usual, higher contributions again once staff are no longer on furlough, the Regulator has said that it will not take any regulatory action for failing to consult.
This "easement" will carry on until 30 June 2020, although this timeframe is subject to ongoing review. It does not apply for staff who are not on furlough – for these employees, where contributions are reduced, employers should consult for the full 60 days.
Employers should also make sure the pension scheme trustee or provider is aware of and can implement any changes to pension contributions and that the proposed change does not conflict with the scheme rules. The Regulator is clear that where there is a conflict, the rules should be amended as necessary.
What about salary sacrifice arrangements?
Where employees have been paying pension contributions under a salary sacrifice arrangement, HMRC has said that the amount of salary and pension contributions recovered under the CJRS for furloughed staff should be based on the post-sacrifice salary. This means if the employer stops making the enhanced employer pension contribution and only pays the AE minimum for those on furlough, employees will receive less salary and only minimum pension contributions. In this scenario, it will be even more important for employers to make sure they have carefully explained, and consulted on where possible, any pensions related changes.
HMRC has also clarified that Covid-19 counts as a life event that would allow members to opt out of the salary sacrifice arrangement if the employment contract is updated accordingly. We anticipate that for someone opting out of their salary sacrifice arrangements this would increase their reference salary for the purposes of the amount claimed under the CJRS, but it is not entirely clear from the guidance. If this is the case, opting out may be the best option for employees particularly where employers have reduced pension contributions to the statutory minimum.
Can members stop or reduce their contributions?
Members can continue to opt out of their workplace pension and stop contributing. Depending on the scheme rules, employees who have opted out may be able to re-join the scheme and contribute at a rate less than the auto-enrolment minimum or the rate required under the scheme.
However, if they pay less than the auto-enrolment minimum, they will need to be re-enrolled in due course along with any other eligible staff who are not in an auto-enrolment qualifying scheme. Employers should be careful not to "induce" staff to opt out as this is not allowed.
Will staff salary continue to be subject to the usual deductions, including member pension contributions?
Yes, if employees continue as active scheme members their pay will continue to be subject to deductions for their employee pension contributions. It will also be subject to deductions for employee NICs and tax.
What about death in service benefits?
Employers should check that the terms of any insurance for death in service benefits are aligned with the any changes to staff salary and/or pension provisions during furlough (or otherwise). The risk here is that the employer or scheme may have to top up any shortfall where the benefit payable under the insurance policy is based on a lower, post Covid salary but the benefit due under the scheme or employment contract is based on a higher salary. The insurance policy may also contain a force majeure clause which means that it is significantly restricted or not payable at all.
What approach will the Regulator take?
The Regulator has said it wants to reassure employers that it will take will take a "proportionate and risk based approach" towards enforcement decisions and a "reasonable, pragmatic and proportionate approach" to its regulation of schemes in the current environment, with the aim of helping to get employers back on track and supporting both employers and savers. Whilst this is good news for employers it remains to be seen how this will work in practice as the legal requirements regarding pensions continue to apply. Employers and trustees should therefore carefully evaluate the risks before taking a decision which would lead to a breach of their duties or obligations.
Can employers expect more changes and guidance?
This Q&A is based on the current guidance published by HMRC and the Regulator. It is very likely that there will be further changes and more guidance. Any legislative changes made to implement the guidance may add further important detail and may not be precisely in line with the guidance given to date. So employers will need to keep a watching brief as we get more information.