No sooner had I published my blog this morning, on the Coronavirus Job Retention Scheme (CJRS) and the treatment of furloughed employees’ pension contributions – highlighting gaps in the HMRC guidance – the Pensions Regulator (TPR) published detailed guidance providing some much-needed clarity and reassurance for struggling employers.
The overriding message is that, whilst employers cannot avoid their legal obligations to contribute to furloughed employees’ pension schemes – these are underpinned by the terms of the employment contact, the rules of the pension arrangement and the automatic enrolment duties – TPR is sympathetic to the plight of struggling employers. TPR states that it “will take a proportionate and risk-based approach towards enforcement decisions, in light of these challenging times, with the aim of supporting both employers and savers”.
These are the key messages contained within TPR’s statement.
- As flagged in my previous blog, the employer and furloughed employee should continue paying the pension contributions required by the applicable employment contract terms and the pension scheme rules/governing documentation. (It follows that employers will need to review the relevant provisions and establish how contributions and benefits will be calculated for furloughed employees. For example, are contributions determined as a percentage of pensionable pay, which is defined in such a way that the pensionable pay amount will be lower if the employee’s wages are reduced during the period of furlough?)
- Employer duties to automatically enrol and re-enrol staff for the purposes of automatic enrolment also continue to apply to furloughed staff. Employees can either choose to reduce their employee contributions (if the scheme rules allow this) or opt out or cease active membership of the scheme if they wish (and normal re-enrolment obligations will then apply). However, employers must not induce or encourage them to choose this option.
- The HMRC grant will only cover “minimum automatic enrolment employer pension contributions” on the subsidised wages of the furloughed employee. TPR has confirmed that this amount will be calculated by reference to 3% of qualifying earnings (i.e. income over the lower limit of qualifying earnings). Employers who calculate automatic enrolment employer pension contributions on a different basis will therefore need to undertake a separate payroll calculation to work out the amount that they can claim from HMRC in respect of those employer pension contributions.
- Where an employer is required (or chooses) to pay pension contributions which are higher than the “minimum automatic enrolment employer pension contributions” covered by the HMRC grant, the extra cost will have to be met by the employer. TPR confirms that this includes situations where higher employer contributions are paid because
- the employer pays top-up salary to the furloughed employee (i.e. more than the 80% of salary (capped at £2,500) that will be covered by the HMRC grant) and that top-up is pensionable pay
- the employer contributes to a defined benefit pension scheme in respect of the furloughed employee
- the employer utilises one of the alternative methods of setting automatic enrolment employer contributions, which do not reflect the 3% of qualifying earnings calculation
- there is a salary sacrifice arrangement in place (Note, however, that TPR has not addressed the uncertainties about the impact of cancelling a salary sacrifice agreement on the amount the employer can claim from HMRC to subsidise the wages of furloughed employees, flagged in my previous blog.)
- Employers wishing to reduce the employer pension contributions that they pay for furloughed employees will need to consider whether the terms of the employment contract and the rules/governing documentation of the pension scheme permit the reduction, or whether amendments are required. Employers should also consider the terms of any relevant agreements with trade unions or staff representative forums.
- Making changes to employment contracts and pension scheme provisions is not a straightforward process. For example, TPR flags that the consent of pension trustees may be required to amend the rules of a trust based pension scheme and that, even if trustee consent is not needed, employers should keep trustees informed. TPR also flags that employers may require legal advice if seeking to agree changes to employment contracts with furloughed employees (not forgetting that proposals to reduce pension contributions may be part of a wider discussion about changes to employment contract terms, if the employee’s wages are also being reduced to the amount covered by the HMRC grant).
- Employers with at least 50 employees are required by pensions legislation to consult with pension scheme members if they are making changes that decrease employer contributions. Compliance with this requirement is policed by TPR. Non-compliance does not invalidate the changes, but leaves the employer open to the risk of an improvement notice or fine. TPR has, however, helpfully confirmed that will not take regulatory action if a struggling employer fails to consult for the full 60 day consultation period if all of the following conditions are met by the employer.
- “You have furloughed staff for whom you are making a claim under the Coronavirus Job Retention Scheme.
- You are proposing to reduce the employer contribution to your DC 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.
- You have written to your affected staff and their representatives to describe the intended change and the effects on the scheme and on your furloughed staff.”
TPR encourages employers to “carry out as much consultation as you can” and states that the regulatory easement will only be available until 30 June 2020 (although this cut-off date will be reviewed as matters progress).
The rules and best practice surrounding the CJRS are evolving at a rapid rate. Employers are already furloughing employees whilst HMRC simultaneously puts the machinery in place to allow those employers to make CJRS claims online. This will not be the last word from TPR – it is working with HM Treasury and the Department for Work and Pensions to feed into the CJRS’s central guidance on the pensions element of the grant and has promised it will be adding to its own guidance next week. Employers should monitor developments closely.