As part of what is now its weekly regulatory update, the Pensions Regulator (tPR) has published its revised guidance on auto enrolment and pension contributions, together with detailed guidance on how the Coronavirus Job Retention Scheme (CJRS) interacts with pension contributions paid under salary sacrifice arrangements.
Although a lot of what is covered by the revised guidance reflects the existing statutory regime, it does provide some further clarity on the CJRS as well as a useful easement on pensions consultation requirements in the limited circumstances where staff are furloughed and the employer is proposing to temporarily reduce pension contributions for the furlough period.
The revised guidance also includes helpful worked examples showing the amount of the employer pension contribution that would continue to be paid under a salary sacrifice arrangement and the amount that can be claimed back from the Government under the CJRS in a number of different scenarios.
The key points are summarised below.
Auto enrolment and pension contributions
- Employers' auto enrolment duties (including re-enrolment and declaration requirements) continue to apply, both for staff who are continuing to work and those who have been furloughed as part of the CJRS
- TPR reminds employers who are approaching their cyclical re-enrolment date that the existing regime allows employers to set a re-enrolment date of up to three months after the third anniversary of their staging date or last cyclical re-enrolment date
- Contributions to the pension scheme should continue to be paid by both the employer and (where applicable) the employee, unless an employee voluntarily decides to opt out of the pension scheme. For those staff that are furloughed contributions should also continue to be paid to the pension scheme, but based on their revised earnings during the furlough period.
Some clarity on the CJRS
- The CJRS does not require employers to make any changes to their pension arrangements or payroll processes. Contributions should continue to be paid by and on behalf of furloughed staff in accordance with the level of contributions specified in the governing provisions of the pension scheme and employees' contractual terms
- The CJRS only permits employers to claim a grant in relation to the pension costs of furloughed staff of up to 3% of their qualifying earnings (ie the band of earnings between £6,240 to £50,000 for 2020/1 tax year) subject to the £2,500 cap per month. So, for example, if a person was paid £2,500 gross monthly when furloughed the employer pension contribution capable of being reclaimed from the government would be 3% of £1,980 (i.e. £2,500 paid less £520 (being the monthly lower qualifying earnings limit)).
For those schemes that pension salary from the first penny of earnings (rather than on the band of qualifying earnings), it will be necessary for them to carry out a separate calculation of 3% of the qualifying earnings for furloughed staff as part of the process for making the claim for the total grant under the CJRS. TPR stresses that this calculation is in addition to the employer's existing payroll calculation for pension contribution purposes (not instead of it).
- If employers are paying more than the auto enrolment statutory minimum contribution, the excess will not be funded by the CJRS. Employers should continue to make the correct contributions due under the governing provisions of the pension scheme and in this case will have to pay a proportion of the pension contribution cost themselves
- TPR acknowledges that in these challenging times employers may wish to temporarily reduce the level of contributions they are paying to defined contribution schemes (subject to the minimum requirements set out in the legislation). Employers wishing to do so will need to consider employees' contractual provisions and the governing provisions of the pension scheme (and whether either require amendment), as well as compliance with any collective agreements with recognised trade unions.
Limited easement on pensions consultation requirements
- Where an employer (who employs at least 50 employees) proposes to reduce its contributions to a defined contribution scheme, there is a statutory obligation on the employer to consult with affected members for at least 60 days in line with prescribed requirements under the legislation. Failure to do so can result in regulatory action from tPR.
Helpfully tPR has announced an easement on these pensions consultation requirements in the limited circumstances where staff are furloughed and the employer is proposing to temporarily reduce pension contributions for the furlough period. Although it encourages employers to carry out as much consultation as they can, in its guidance tPR confirms that it will not take any regulatory action in respect of a failure to consult for the full 60 day period where:
- the employer has furloughed staff under the CJRS
- the employer is proposing to reduce its contribution to its defined contribution scheme for furloughed staff only
- the reduced contribution rate for furloughed staff will only apply during the furlough period, after which it will revert to the current rate; and
- the employer has written to affected members and their representatives describing the intended change and the effects on the scheme and the furloughed staff.
This regulatory easement will be maintained until 30 June 2020, but tPR will review this date as matters progress.
CJRS and pension contributions paid via salary sacrifice arrangements
- When calculating the pension contribution due for a furloughed worker who has agreed for pension contributions to be paid via salary sacrifice, any contractual obligations the employer has entered into and its obligations in the pension scheme rules continue to apply as normal.
- The government’s guidance on the CJRS sets out that when calculating 80% of a furloughed worker’s salary or wage, the reference salary or wage to use is the amount after the salary has been sacrificed. All of the grant received from government to cover the furloughed worker’s pay must be paid to them in the form of money. The pay during the furlough period should be treated as the post-sacrifice pay so that no further sacrifice is made on that amount.
TPR notes that importantly this is just for the purposes of making a claim for a grant from government and what that grant can be used for. Any contractual obligations the employer has entered into as part of the salary sacrifice arrangements and the obligation in the pension scheme rules continue to apply as normal, so the first step for an employer is to consider their contractual arrangements.
In other words an employer cannot deduct the amount their furloughed worker would normally sacrifice in their wage for pension contributions from the furlough pay, as this will mean that the amount the employer has claimed under the CJRS will not have all been paid as money. This means that the employer will pay the total contribution due under the pension scheme rules.
- HMRC has advised that COVID-19 counts as a life event, meaning that the terms of a salary sacrifice arrangement could be changed, if the relevant employment contract is updated accordingly with agreement. The pension scheme rules are separate from any salary sacrifice arrangement that is part of a furloughed worker’s contract of employment. As noted above, the obligation under the pension scheme rules is for the employer to pay the total contribution. If the salary sacrifice arrangement is ended the pension scheme rules will continue to apply to the employer, and no contribution will be due from the furloughed worker, unless the rules cater for workers who do not agree to contribute via salary sacrifice and instead contribute directly to the pension scheme
- Any changes made to the salary sacrifice arrangement from 19 March 2020 do not affect the calculation of the reference wage for the purpose of the CJRS. This calculation is done as at the furloughed worker’s last pay period prior to 19 March 2020 (with slightly different rules applying for those with variable pay, although these too look back to what the furloughed worker was paid in certain periods prior to 19 March 2020 and so would also not be affected by any changes to a salary sacrifice arrangement now).
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