Pension contributions and the coronavirus job retention scheme

The current economic turmoil has prompted many employers to take advantage of the Government’s coronavirus job retention scheme (CJRS) by furloughing a substantial part of their workforce. As well as the employment complexities associated with taking this step, furloughing workers raises a number of questions about the treatment of their pensions and other benefits during the furlough period. In particular, it raises issues around how pension contributions should be calculated while employees’ wages are being reimbursed through the CJRS and whether employers who furlough staff are caught by the requirement to consult with employees on pension scheme changes. Helpfully, the Pensions Regulator (tPR) has produced some new guidance which gives employers some of the answers.

Furlough and pension contributions

When employees are furloughed, they will pay employee pension contributions calculated on their usual contribution rates, but based on the salary which they actually receive. Employers can claim back their own employer pension contributions through the CJRS, up to the statutory minimum level of 3% of qualifying earnings – this is the earnings band up to £50,000. Where employers pay contributions above this level (e.g. a higher percentage of qualifying earnings, or because their pension contributions are calculated by reference to a different salary denominator such as basic pay), then they must fund this excess themselves and no rebate is available from the CJRS. If the employer decides it wants to alter pension contributions, they will need to consider their employment contracts, whether any changes need to be made by agreement, and also if there are any agreements with recognised trade unions or other staff representative forums which requires prior discussion or notification of such changes.

One important difference, however, is where pension contributions are being paid through salary sacrifice. This is because the Government’s latest guidance on the CJRS says that where the employer provides benefits to furloughed employees, this should be in addition to the wages that must be paid under the terms of the CJRS. Because the effect of a valid salary sacrifice arrangement is to convert an employee pension contribution to an employer-provided benefit (in the form of an enhanced employer pension contribution), it follows that the cost of pension contributions paid during furlough through salary sacrifice need to be met by the employer in full (unless the salary sacrifice arrangement can be varied with employee agreement). This could have a significant cost implication for employers who use salary sacrifice and place staff on furlough, unless the employer is able to reach an agreement with the employee to reduce pension contributions. This is likely to be more difficult where salary sacrifice arrangements are in  place and there is no corresponding benefit to the employee in terms of a reduced employee contribution. Nevertheless, given the serious financial pressures currently faced by employers, there may still be a path to getting employees to agree to this.

Also, if the pension scheme in question is defined benefit (DB) in nature, then the analysis is different again. This is because the obligation to pay contributions on members will be set out in the pension scheme rules and altering this may require a rule amendment to the scheme, potentially involving Trustee agreement and also prior consultation with members – see further below.  Also, altering the rate of contributions to a DB scheme will have a funding impact and potentially will increase the liabilities which the employer owes to the scheme and so detailed advice would need to be taken, with actuarial input, before such a decision was taken.

Is there a need to consult on pension changes?

Where an employer who has more than 50 employees proposes making a “listed change” to its pension arrangements, the employer must first undertake a 60-day minimum consultation period with its pension scheme members. In the context of a group personal pension arrangement, a listed change would include a proposal to reduce or cease employer contributions to the scheme, or to increase member contributions. In the case of a DB scheme, listed changes would include a proposal to close the scheme to future accrual, limit increases to pensionable pay or to change the rate at which benefits were revalued in the scheme. Where an employer fails to comply with the consultation requirements, tPR can take enforcement action, including by issuing a fine or up to £50,000, or an improvement notice, requiring the employer to consult again.

Many employers furloughing staff will want to consider reducing their pension contributions.  However, given the pace at which many employers are being forced to furlough staff, undertaking a 60-day consultation would appear logistically difficult.  And of course, given that the CJRS is currently only open until 31 May (although this may be extended), a decision not to furlough staff pending completion of consultation would likely be detrimental to the interests of both employer and pension scheme members.

Importantly, tPR has now introduced a specific easement for employers who reduce contribution rates to group pension plans during furlough. It has stated that if all the following conditions are met, it will not take regulatory action in respect of a failure to consult for the full 60 days:

• The employer has furloughed staff for whom it is making a claim under the Coronavirus Job Retention Scheme
• The employer is proposing to reduce the employer contribution to the group pension scheme in respect of furloughed staff only. For staff who have not been furloughed, the existing pension contribution rate will continue to apply
• The reduced contribution rate for furloughed staff will only apply during the furlough period, after which time it will revert to the current rate
• The employer must have written to affected staff and their representatives to describe the intended change and the effects on the scheme and on the furloughed staff

Significantly, these conditions also only apply to reduced contribution rates to group pension arrangements and where all the above criteria have been met. If the criteria are not satisfied, or another form of listed change is proposed (such as a closure to accrual for a DB scheme), tPR still expects employers to comply with the consultation requirements in full. It is also interesting to note that tPR still encourages employers “to carry out as much consultation as you can”. Given the timing and financial pressures faced by businesses who are moving staff on to furlough, we would hope that this can be met through prior notice to staff and representatives and establishing a conduit through which views and information can be exchanged. This regulatory easement will apply until 30th June, subject to further review.