Part 3: DC Schemes – Covid-19: Continuation of Employer and Employee Contributions

20 / 04 / 2020

Many employers and employees alike are facing extreme financial difficulties in light of the COVID-19 pandemic.  In the circumstances, it is understandable that employers might seek to make savings in respect of pension contributions and, where applicable, will want to make use of the ability to reclaim pension contributions under the Government’s Coronavirus Job Retention Scheme (the “Furlough Scheme“).

Whilst cutting pension provision is not necessarily a wise step long-term, making temporary changes to your pension provision can have a significant impact on your cash-flow and may help avoid cutting salaries and/or jobs. However, the extent to which pension contributions can be reduced is likely to be employer (and scheme) specific.  In addition, reclaiming pension contributions under the Furlough Scheme is not as cut-and-dry as merely reclaiming any amounts paid as pension contributions in respect of employees furloughed under that scheme.  Finally, employers may find themselves in a difficult position if their employment contracts include salary sacrifice arrangements.

What savings can employers make?

Employers (irrespective of whether they are using the Furlough Scheme) may be able to make significant cost-savings during this difficult time by reducing their pension contributions.  Many employers may think they are paying the statutory minimum already, simply because they are paying a “3% employer contribution”, but if you’re paying 3% on basic salary there are further savings you could make.

In particular, the requirement to make a contribution of at least 3% for auto-enrolment purposes is referable to “qualifying earnings”, rather than employee’s total earnings. The nature of “qualifying earnings” is outside of the scope of this article, but such earnings are broadly describable as earnings within prescribed bands (bands which vary each tax year).  Therefore, depending on the circumstances, some employers may be able to make savings in respect of pension earnings by reducing the amount they pay to a level commensurate with the statutory requirements, rather than paying contributions referable to an employee’s total salary.

If an employer seeks to reduce their contributions down to the statutory minimum this might also provide employees with a similar opportunity to reduce their employee contributions down to the statutory minimum level.  Even if your employees haven’t yet suffered a reduction to income, someone else in their household may have done, making a reduction to outgoings very attractive to them.

It is essential that employers seeking to change contribution levels first:

  • review their employment contracts to ascertain whether any contractual amendments need to be made before implementing such changes.  This is something our very experienced Employment team can assist with.  In some cases, savings may require the consent of the employee; and
  • consider the implications of the 60-day consultation requirements which apply to employers with 50 or more employees making certain “listed changes”. 

On 9 April 2020, the Regulator published guidance in respect of the consultation requirements, clarifying that the Regulator will not take regulatory action (against an employer with at least 50 employees) for a failure to consult for the full 60 days where:

  1. the employer has furloughed staff under the Furlough Scheme;
  2. the changes relate to reduced contributions (under a defined contribution scheme) for furloughed staff only;
  3. the reduced rate of contributions will only apply during the furlough period and will return to current levels thereafter; and
  4. the employer has written to all affected staff and their representatives to explain the changes on furloughed staff.

We are keeping a close eye on the announcements from the Regulator and this is something which we can advise on if you are planning on making changes to your pension arrangements.

How much can employers reclaim under the Furlough Scheme?

For employers which are furloughing staff,  the amount you can reclaim from HM Revenue & Customs under the Furlough Scheme will be lower than 3% of the staff’s full furlough pay.  Again, this issue revolves around the concept of “qualifying earnings”, and employers wishing for the Furlough Scheme to produce a cost-neutral result are likely to need to reconsider altering their level of pension provision (taking into the relevant factors mentioned above in the “What savings can employers make?” part of this article).

According to the Government’s guidance on the Furlough Scheme published on 26 March 2020, claims under the scheme (including claims for grants in respect of employees’ usual wage costs and national insurance contributions) can only be made once every three weeks.  Claims  can be made in respect of one or more employees, but prudent employers should seek to aggregate potential claims into one consolidated claim for contributions (to be made once every three weeks).  Our Employment team are experts in relation to the Furlough Scheme and are already hugely experienced in guiding employers through this new area of law – please get in touch if you’re considering implementing furlough or have taken steps to implement furlough but are concerned about some aspects.

Finally, the Government’s guidance suggests that grant payments received under the scheme are to be included as income in the receiving business’ calculation of taxable profits for income tax and corporation tax purposes. Accordingly, some employers may wish to consider the impact of Furlough Scheme grant monies on their corporation tax position and, in some cases, specialist advice may need to be taken to properly account for such grant monies.  Again, our Tax team can assist with any such queries.

How does the Furlough Scheme interact with salary sacrifice arrangements?

Salary sacrifice arrangements can help employers make significant National Insurance Contributions savings.  However, the interaction of salary sacrifice with the Furlough Scheme adds a level of complexity.

According to the Government’s guidance, the amount of any benefits provided through salary sacrifice schemes (including pension contributions) are not to be included in the reference salary being reclaimed under the Furlough Scheme.  The same applies to non-monetary benefits to employees, such as taxable benefits in kind.  The result being that an employer will be able to reclaim less under the Furlough Scheme than if salary sacrifice arrangements were not in place therefore resulting in a reduction to the level of money received by a furloughed employee if the Employer isn’t topping-up furlough pay..

Additionally, some employers may query whether the pension provision to be contributed is referable to the employees’ salaries before or after the salary sacrifice has been applied. The Government’s guidance suggests that the correct figure is 80% of the actual post-sacrifice salary. Therefore, some furloughed employees may be worse off than originally anticipated, with employer contributions being reduced to be proportional only to the amount that the employee actually receives whilst furloughed (including by disregarding any amounts withheld by the employer for the purposes of the salary sacrifice arrangements).

The government have announced that the coronavirus/Covid-19 would qualify as a lifestyle event (potentially allowing existing salary sacrifice arrangements to be terminated/altered).  Whilst this may be useful for employees who are seeking to terminate pension contributions during this difficult time, it will have little benefit in relation to the existing Furlough Scheme which is based on the level of pay received by an employee during the 2019/20 tax year.