Penny Cogher and Larisa Gordan from Irwin Mitchell give their view on pensions and furloughing:
Since the Government published details about its Coronavirus Job Retention Scheme, there have been many questions asked about what it means for pensions.
While we don’t yet have the complete picture about furloughing and its impact on pension contributions, we are expecting guidance on it from the Government, HMRC and the Pensions Regulator. In the meantime this is what we do know:
The Government will only pay the Auto Enrolment minimum employer pension contribution ie 3% on the 80% or £2.5k per month if lower of the employee’s regular monthly wage (no commission, fees or bonus). If the employer pays more then the Government’s furloughing scheme only covers 3%, it won’t pay any extra.
- The Government‘s scheme will not cover the employees’ auto-enrolment pension contributions at all.
- For members who are part of a pensions salary sacrifice scheme, the 80% pay is based on the employee’s reduced salary and the Government’s scheme will only cover 3% of the salary sacrificed amount. The information that has to be provided to HMRC is all based on what goes through PAYE and so there is no allowance for salary sacrifice.
- The 3% itself is based on 3% of earnings above the lower qualifying earnings threshold (£512 per month up to 5 April and £520 after that). This is the case regardless as to the definition of pensionable earnings used by the employer for auto-enrolment and regardless of which quality test is used for auto-enrolment
Our view is that the legal position currently is that the employer must top up any difference in contribution rates if it is furloughing. If the employer is not prepared to do so then this amounts to a listed change as it is a change to its pension contribution structure. This then requires the employer, if it has 50 or more employees, to consult for 60 days before changing its pension contribution structure. This is just a consultation – individual consents are not required.
The Pensions Regulator has the power to issue a £50k fine if the employer fails to satisfy its statutory 60 day pension consultation obligations. It is also separately a change to an employee’s terms and conditions and so the employee could claim constructive dismissal if they do not agree to the change ie there is the potential for a breach of contract claim.
However we understand that the Pensions Regulator is looking at relaxing the 60 day consultation obligation as this doesn’t work well with the idea of furloughing and the flexibility that this aims to bring employers. We understand that some Guidance is expected relatively soon from the Pensions Regulator.
Separately employers should not be encouraging their employees in any way to opt out of auto-enrolment and it is a statutory offence to do so. An employee must pay the minimum auto-enrolment contribution of 5% on qualifying earnings unless the employer pays this. There is no flexibility on this in the auto-enrolment legislation.
Also we understand that the Government is to issue Guidance on how to calculate the contributions before employers can apply for the furloughing grant. We expect this to specify whether the difference the employer has to make up is on the new furloughed amount or the higher pre-furloughed amount. HMRC are actively looking at this at the moment.
The Government’s announcements on furloughing do not specifically mention Defined Benefit schemes. It is unclear what impact furloughing will have – is Defined Benefit accrual to be maintained? If so, the 3% employer contribution rate is not likely to be sufficient. We have to just wait for further guidance for this to be clarified. It may not be an immediate priority for the Government as the public sector and local authorities, for example, are not immediately going to go down the route of furloughing employees.