Pensions and the Government’s Coronavirus Job Retention Scheme – five key takeaways
In response to the financial pressures on businesses stemming from the current Coronavirus crisis, the Government has created the Job Retention Scheme (JRS), a government funded alternative to redundancies. While the JRS is primarily an employment law matter, there are pensions aspects to it and guidance on those aspects is (to date) rather limited.
Despite the lack of clarity on the pensions front, here are my five key takeaways on pensions:
1. What pension contributions are covered by the JRS?
The guidance states that HMRC will reimburse employer NI contributions and minimum auto enrolment employer pension contributions due on the amount claimed for furlough wages. But what are “minimum auto-enrolment pension contributions” for this purpose? The original guidance referred to 3% of qualifying earnings based on the gross amount of furlough pay, which is the standard minimum quality requirement for defined contribution (DC) schemes.
- Many employers’ DC schemes use alternative quality requirements for calculating their minimum contributions in compliance with legislation (eg. 4% of base pay), or pay more than the auto enrolment minimum; and
- some employers use defined benefit schemes for auto-enrolment compliance, and their future service accrual rates require employer contributions above the DC minimum for auto enrolment
Although the government has said that further guidance will be provided on how employers are to calculate the pensions element of the furlough scheme claim, is that just going to help with the maths? Can employers who pay more than the 3% of qualifying earnings minimum reclaim that additional amount? If not, how do employers do that calculation when payroll systems are not set up on that basis? Although the latest version of the HMRC guidance removes the specific reference to 3% qualifying earnings and refers only to the minimum payable(thus raising hopes that employers would be able to claim minimum contributions on furlough wages, howsoever that minimum is calculated under the particular scheme), the Pensions Regulator’s latest guidance does not support that interpretation. It remains to be seen if there is any further movement on this point.
What is clear is that any contributions above the minimum for auto enrolment cannot be claimed under the JRS.
That leads on to the question:
2. Can pension contributions be reduced?
The short answer is “yes, but”.
Employers who currently pay more than minimum contributions but want to be able to recover all of their costs under the JRS will need to change their furloughed employees’ terms and conditions relating to pensions as well as pay. And changes to pensions terms in respect of the furlough period may also need to be reflected in changes to scheme rules.
There are two key points for employers to consider when looking to reduce contributions: (i) they cannot drop below the statutory auto enrolment minimum (whether employer or total contribution); and (ii) the statutory requirement to consult.
Any reduction in the rate of employer contributions (or indeed an increase in employee contributions) would ordinarily be a “listed change” requiring 60-day pension consultation before the change is implemented. It is clear that in the current circumstances 60 day consultation is neither practical nor realistic. What was not clear was whether agreeing such changes with employees (or their representatives) would be sufficient to avoid enforcement action from the Pensions Regulator if there was little or no consultation. Given the policy intention behind the JRS is for the employer to be able to move employees onto furlough swiftly, the Pensions Regulator has today confirmed that it will take a pragmatic approach and not take enforcement action against employers who do not comply with the statutory requirement, provided certain conditions are met.
3. Can employees opt out / reduce contributions?
Employees will always be able to opt out, but you will need to check the rules of the scheme for flexibility to reduce or suspend contributions. Many schemes will allow a short term reduction / suspension of contributions by members in certain circumstances. Again there are two things to watch out for here: (i) if the scheme is an auto enrolment scheme, the employer must not incentivise employees to opt out (so be careful what you say); and (ii) if employees ask about this, you will need to warn them if they will lose employer contributions as a consequence of reducing or suspending their own contributions.
4. Salary Sacrifice
Many employers allow their staff to pay pension contributions via a salary sacrifice arrangement and salary sacrifice is a particular problem area with JRS. The starting point is clear: the JRS guidance states that the salary that must be used for calculating an employee’s furlough pay is the post sacrifice salary. Employees in a salary sacrifice arrangement may therefore be at a disadvantage when compared with those who pay member contributions through normal payroll deductions.
The issue is that while an employer can then claim its own minimum auto enrolment contribution on the employee’s furlough wage, it cannot claim under the JRS for the employee’s contribution, even though the employer is responsible for paying that employee contribution under the salary sacrifice arrangement.
As a result, employers may wish to consider removing the option to pay pension contributions via salary sacrifice for furloughed staff. While there are restrictions on the circumstances in which an employee can make changes to their salary sacrifice arrangement, the JRS guidance makes clear that Covid-19 is a “life event” which will allow them to do so.
5. Death in service benefits
Lastly, a number of employers have queried the impact of the JRS on death benefits payable to furloughed employees. In terms of the employee’s employment contract, if the multiple of salary covered by the death in service benefit is based on a definition that is amended appropriately as part of the furlough agreement that should flow through and the multiple will be of the reduced furlough salary.
However, employers should also check the terms of any underlying insurance policies to see precisely what is insured. It may be possible to continue cover based on the pre-furlough contractual pay, but confirmation should be sought from the insurer concerned.
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