18: COVID-19 and furlough: implications for pension contributions and auto-enrolment

Many employers are currently grappling with the pension implications of placing staff on furlough under the Coronavirus Job Retention Scheme (CJRS) as well as reducing contributions for staff who continue to work. On 9 April, The Pensions Regulator (TPR) published guidance on pension contributions and auto-enrolment during the pandemic.

Pensions implications of furloughing staff

• Under the CJRS an employee may have a period of paid leave (furlough) during which the employer will be able to claim for a grant from HMRC covering the lower of 80% of the employee’s salary or £2,500 per month plus employer NI contributions and pension contributions up to the statutory minimum employer auto-enrolment contribution.
• Employers’ and employees’ pension obligations are governed by pension scheme rules and contracts of employment and will not be changed by a claim under the CJRS. Unless employees ask to opt out of the pension scheme, both employer and employee contributions must continue to be made as usual and at the correct time.
• TPR states employers may only claim for pension contributions based on the statutory auto-enrolment minimum ie 3% of qualifying earnings between £6,240 and £50,000. This maximum will apply regardless of which type of scheme is used to satisfy an employer’s auto-enrolment obligations. Where a different basis is used for pension contributions (such as a different pensionable salary and/or using different qualifying scheme certification criteria), employers will therefore also need to calculate 3% of the qualifying earnings of its furloughed staff when making a claim under the CJRS.
• Contributions in excess of the auto-enrolment minimum will not be funded by the CJRS grant but must continue to be paid by employers in accordance with the scheme’s rules and contracts of employment. For example, many employers may contribute more than 3% especially where they are active members of a DB or hybrid scheme; or the scheme requires contributions from the first penny of earnings.
• It is currently unclear whether the CJRS grant will cover contribution costs for an employee who is not eligible for statutory auto-enrolment contributions.
• Pension contributions made through salary sacrifice schemes cannot be included in the reference salary used to claim for a furloughed employee. HMRC has confirmed that COVID-19 constitutes a ‘life event’ that could warrant changes to salary sacrifice arrangements. Care will be needed in establishing employer obligations and how these interact with a reference salary determined at March 2020 for furlough purposes.
• Trustees of pension schemes who have been furloughed are likely to be able to continue to act as a trustee in most cases because their appointment is not part of their employment contract and they are not providing services or generating revenue for their employer.

Reducing employer contributions

• Pension scheme rules and contracts of employment should be checked to establish the definition of salary and pensionable salary on which contributions are based. If contributions are linked to monthly salary, then the actual contribution obligation will reduce accordingly. However, if pensionable salary is not directly linked to salary (eg it is set at a fixed rate on an anniversary date in each year) then contributions will need to be based on the unreduced pensionable salary.
• In that case, employers may be able to reduce contributions but not to a level below the statutory auto-enrolment minimum. When deciding whether to make reductions, the scheme’s governing documentation will need to be checked to clarify whether amendments are needed and if so, the correct procedure to follow.
• Employers will also need to check the terms of all relevant employment contracts and consider whether employees’ consent to a change is required. Trade unions or staff representative bodies may need to be notified and / or consulted and there may also be a requirement to consult under pensions legislation (more detail on TPR’s approach to consultation obligations can be found here.
• The impact of any salary change on ex-members of closed defined benefit schemes who have retained a link to their salary may also need to be considered.

Reducing employee contributions

• Employers may wish to offer employees the opportunity to reduce contributions to the auto-enrolment minimum level, subject to the rules of the scheme (for example, the definition of pensionable salary) and their contracts of employment. Employers may also wish to offer the option for employees to opt out or cease active membership of the scheme but care should be taken not to induce employees to do so.
• DB scheme rules may also allow the employer to waive employee contributions or reduce them temporarily – often in the scheme’s absence provisions – but this could mean the employer picking up the resulting funding shortfall or storing up a future catch-up contribution obligation for employees.

Employers struggling to make pension contributions

• Employers who are struggling to make pension contributions should speak to the managers / trustees of their scheme as soon as possible to explore options such as changing the due date for payment or paying contributions over a longer period.  Given the challenging environment, TPR has asked scheme providers, including trustees, to report late contribution payments to TPR and scheme members at 150 days late, rather than the usual 90 days.

TPR has also confirmed that employers’ statutory auto-enrolment, re-enrolment and re-duties will remain in force throughout the pandemic for both furloughed employees and those who are working. However, TPR emphasises it will take a proportionate and risk-based approach towards enforcement in light of the current circumstances but will continue to protect members’ interests.

If steps are taken to reduce employee and / or employer contributions, the implementation of changes to rules, employment contracts and salary sacrifice arrangements – and the attendant consultation obligations – can be complicated. Where appropriate, professional advice and support should be sought. At BDB Pitmans our specialist pensions and employment teams have been guiding some of our clients through these issues and we are here to help.