Last week, our pensions expert, Penny Cogher looked at the key issues employers need to be aware of when making pension contributions to furloughed staff. That blog is available here.

Since then, the Pensions Regulator has issued helpful guidance on the approach it will take as regards employers satisfying their auto-enrolment obligations in the current climate.

The Regulator emphasises it will take a proportionate and risk-based approach over enforcement decisions, in these challenging times, with the aim of supporting both employers and savers. It is working with HM Treasury and the Department for Work and Pensions to ensure its pensions Guidance is fed into the main Coronavirus Job Retention Scheme. The Regulator will continue to add to its guidance this week (i.e. week commencing 14 April 2020) so watch this space for further updates.

The starting point for all employers

An employer’s automatic enrolment (AE) duties continue to apply as normal, including re-enrolment and re-declaration duties, regardless as to whether employees are still working or have been furloughed.

New employees

This means the AE rules continue to apply if an employer has new employees. They must be assessed for AE but the three month postponement process can be used to delay this assessment and the paying the pension contributions for this period. We can assist you with making sure that your new contracts of employment allow this.

Auto-enrolment re-enrolment

This process must be carried out by employers when they are notified by the Pensions Regulator that they must do so i.e. when they are approaching the third anniversary of their initial staging date. Postponement is not possible for re-enrolment but there is a three month period allowed for this after the initial re-enrolment date.

Pension contributions

The obligation for employers and employees to pay pension contributions is set out in the pension scheme’s rules, contracts of employment, scheme guides and the payment schedules or schedules of contributions. Usually the temporary absence rules are sufficiently wide and flexible to allow for furloughing.

Employees can opt out and so cease active membership of the scheme but employers must not encourage or induce them to do so. These employees must then be considered for re-enrolment in accordance with the re-enrolment criteria at your next re-enrolment date. Employers and employees must otherwise continue to make the contributions required under the scheme at the correct time and the contributions must not be used for any other purpose.

The Pensions Regulator suggests that if an employer has cash flow difficulties, it should explore whether there is flexibility to change the due date for payment of employer contributions to a future date or if it is possible to plan to pay contributions over a longer period, or investigate using the Government support packages which aim to help in these circumstances.

Payroll processes and pension contributions with furloughing

An employer’s normal payroll processes should be run as usual, with furloughing - no changes are necessary to the existing pension arrangements or payroll processes. The current scheme rules and contribution requirements continue to apply. When the employer pays its employees, they should run their pension contribution calculation as usual, with national insurance contributions and pension contributions being made from the furloughed employee’s wages and paid as usual.

However some changes are needed if the employer does not use banded qualifying earnings. If so, the employer has to calculate and pay across the pension contribution as normal but the employer also needs to calculate 3% of the qualifying earnings of the furloughed employees so it can claim for them under the Coronavirus Job Retention Scheme.

Employer contributions are higher than the statutory minimum contribution for auto-enrolment (AE) and how to reduce them

The Coronavirus Job Retention Scheme only covers the statutory minimum employer contributions – it won’t cover any excess. So the employer must cover these themselves and pay the correct contributions due under the scheme. The Regulator has confirmed it is possible to reduce an employer contributions to a DC scheme to the statutory minimum but not below it.

Key considerations are:

  • The pension terms of the employees’ contracts of employment – we can help with this legal analysis and it will be needed
  • Any agreements with trade unions/representative groups over pensions
  • Your scheme rules and other governing scheme documentation and how they can be changed and what is possible under the temporary absence rules if these apply – again we can provide specialist legal advice on this
  • Going through a formal pension consultation for at least 60 days if the employer has more than 49 employees if it wants, for example, to reduce the rate of employer pension contributions it pays to a DC scheme.

This consultation is “policed” by the Pensions Regulator. The Regulator has helpfully announced the following relaxations that are to last until 30 June 2020, when it will then review the position.

The relaxation is that the Pensions Regulator will not take regulatory action in respect of a failure to consult for the full 60 days if:

  • The employer has furloughed employees for whom it has made a claim under the Coronavirus Job Retention Scheme.
  • The employer is proposing to reduce the employer contribution to the DC scheme solely in respect of the furloughed employees and there is no change in contribution rate for the non furloughed employees.
  • The reduced contribution rate for furloughed staff will only apply during the furlough period. After that it will revert to the normal employer contribution rate.
  • The employer has written to all affected employees and their representatives to explain what it is proposing to change, the effects this will have on the scheme and on its furloughed employees i.e. its affected staff. The Pensions Regulator encourages employers to do as much consultation as they can.

A full 60 day consultation is still required if the employer wants to change employer contributions outside this relaxation of the pension consulting requirements. We strongly recommend that any employer that is proposing to reduce its employer contribution rates in accordance with the above relaxation fully documents the steps it has taken to ensure it has a full paper trail if the Regulator subsequently starts to ask questions.