Coronavirus job retention scheme: pensions aspects

When considering how to use the coronavirus job retention scheme (CJRS), employers may be wondering what this means for pension contributions and auto-enrolment obligations. This update considers some of the issues.

How the CJRS works

To access the CJRS an employer will need to designate affected employees as furloughed workers, notify the employees of this change, and agree it with them. An employer can apply to HMRC for reimbursement of 80% of furloughed workers’ wages up to a maximum of £2,500 a month. Our article answering questions on the CJRS from an employer point of view has more detail on how the scheme is expected to work. 

What happens to pension contributions?

Further government guidance on the CJRS makes it clear that employer pension contributions are included within the grant that employers can access to cover 80% of the wages of furloughed employees.

The latest guidance states that employers can receive a grant under the CJRS to cover the lower of 80% of an employee’s regular wage or £2,500 a month, plus the associated employer national insurance contributions and minimum automatic enrolment employer pension contributions on that subsidised wage.

This means that the amount employers can claim in respect of pension costs will be the minimum auto-enrolment contributions based on the furloughed employee’s wage. Under the auto-enrolment legislation this will be 3% of qualifying earnings between £520 (the monthly lower end of the qualifying earnings band for the 2020/21 tax year) and £2,500. 

Where an employer pays more than the minimum in respect of its employees, those contributions will remain a cost of the employer and cannot be claimed under the CJRS. Similarly, if an employer pays a top-up salary to furloughed employees, employer contributions on this top-up salary will not be funded by the CJRS. Employers should continue to pay contributions in accordance with the rules of the pension scheme.

Before the CJRS goes live, further guidance will be issued on how to calculate claims for minimum auto-enrolment employer pension contributions.

What about employee contributions?

Furloughed employees will still have to pay employee pension contributions on their qualifying earnings. Although the amount an employee pays will be lower on an 80% furloughed salary, furloughed employees may also want to temporarily reduce or suspend their employee contributions during the period of furlough, or even opt out of the pension scheme altogether and opt back in later.

Pension scheme rules may allow an employee who is, with the agreement of the employer, temporarily absent from work (and accordingly receiving reduced or no pay), to reduce or stop their pension contributions for that period of temporary absence. This is likely to require employer and possibly trustee consent. Pension scheme rules will vary and should be checked. 

Where an employer uses a group personal pension scheme or a master-trust for employee pensions, terms of those arrangements will need to be checked. 

An employee’s employment contract may also contain terms relating to pension provisions. Changes to any such terms will require the employee’s consent.

Employers should check employment contracts and the pension scheme rules for any restrictions on the way in which employee pension contributions are calculated, as well as checking rules on the suspension of contributions under the pension scheme.

What about auto-enrolment eligibility?

It is possible that some furloughed employees may see their pay fall below the automatic enrolment earnings threshold such that they might not be eligible for auto-enrolment during the period of furlough.  However, in practice, we tend to find that even if an employee is not in a pension scheme for automatic enrolment purposes, they remain in the scheme by way of contractual enrolment. 

Employees who have been automatically enrolled into a pension scheme have a statutory right to opt out of that scheme, but only for a short window after the initial enrolment. Guidance from the Pensions Regulator recognises that after the initial statutory opt-period, an employee may agree under pension scheme rules to reduce contributions or to opt out in line with the terms of the scheme (see previous question). Where contributions are lower than the minimum required for auto-enrolment, the scheme will no longer be a qualifying scheme in respect of that member. Advice should be sought if this is a concern.

What about DB schemes?

For some DB schemes with active members, there is the risk of a section 75 employer debt being triggered if all active members are furloughed and, as a result, are no longer active members under the rules of the pension scheme. Where this is a concern, the trust deed and rules of the pension scheme should be checked, and legal advice sought. The continuation of life assurance cover under such a scheme (see next question) could be a factor in the argument for continuing pensionable service. 

Is a furloughed employee still ‘in service’ for the purposes of death in service benefits?

Our understanding is that all other contractual terms will continue to apply during the period of furlough, so it seems likely that a furloughed employee would remain ‘in service’ for death in service benefits. It is possible that the level of death benefit cover provided could be affected if the cover is based on the reduced pay that the employee is receiving during furlough. Employers should check the terms of their insurance cover and the rules of the death in service scheme.

What about employees who are not furloughed?

A non-furloughed employee may also be temporarily on reduced pay, if agreement has been made with the employer to reduce hours and pay during the coronavirus crisis. A request from a non-furloughed employee to temporarily reduce or suspend pension contributions will, as above, depend on whether this is permitted by both the terms and conditions of employment and the rules of the pension scheme. As with furloughed employees above, death in service cover may also be affected by reduced pay.

This article is up to date as at 3 April 2020.