COVID-19 and pension contributions

When calculating the pension contribution due for a furloughed worker who has agreed a salary sacrifice arrangement for pension contributions, any contractual obligations an employer has entered into and the obligation in the pension scheme rules continue to apply as normal.

However, as all of the grant claimed must be paid to a furloughed worker in the form of money this may mean that, where a salary sacrifice arrangement is in place for pensions, an employer will need to amend their payroll processes to calculate the pension contribution to be paid to the pension scheme under the pension scheme rules.

Employer consultation requirements

The requirement under pensions legislation to consult on certain changes only applies if an employer has at least 50 employees.

Before an employer can decide to decrease employer pension contributions they must carry out a consultation in accordance with a number of rules. These rules include that the minimum period of consultation must be 60 days.

Employers cannot use postponement at re-enrolment. However, if they are struggling to complete their re-enrolment duties on the third anniversary of their staging date or duties start date due to the coronavirus pandemic, they can choose a later date up to three months after their third anniversary to assess their staff.

What if the employer’s pension scheme operates on a salary exchange basis?

A salary sacrifice arrangement is a contractual agreement between the employee and their employer, where the employee agrees to give up some of their salary in return for a benefit such as a pension contribution by the employer. It is usually set up by changing the terms of the employee’s contract of employment by agreement.

The operation of a salary sacrifice arrangement for pension contributions is separate from the automatic enrolment provisions and pension contribution obligations set out in a pension scheme’s rules or governing documentation. 

Pensionable pay

If pensionable pay sacrifice is operated then usually, under the pension scheme rules, the obligation on the employer is to pay the total contribution, however it is calculated. In most cases, the scheme rules or governing documentation will define pensionable pay as the notional pre-sacrifice pay. The amount the employee sacrifices is paid across to the pension scheme as part of the overall employer contribution. There is no obligation under the pension scheme rules or governing documentation for the member of staff to contribute. 

The existence of the grant available under the Coronavirus Job Retention Scheme does not change an employer’s usual pension contribution payment obligations or processes. 

Guidance from the Government makes it clear that the salary for calculating the grant should not include the cost of non-monetary benefits provided to employees, including taxable benefits in kind. Benefits provided through salary sacrifice schemes, including pension contributions, that reduce an employee’s taxable pay should also not be included in the reference salary. 

Schemes which operate a salary sacrifice basis will therefore get back less from the Job Retention Scheme than if they didn't have the arrangement, as the salary used for the 80% grant and the minimum employer contribution is reduced. 

It is important to note that all the grant received to cover an employee’s subsidised furlough pay must be paid to them in the form of money. The grant cannot be reduced to pay for the pension contribution. 

Life events

HMRC has confirmed that COVID-19 counts as a life event that could warrant changes to salary sacrifice arrangements, if the relevant employment contracts are updated accordingly. 

Working part-time while on furlough from 1 July 2020

Under the rules of the Coronavirus Job Retention Scheme, pay cannot be reduced below a certain level.  The levels vary and those that currently apply can be found in HMRC’s Claim for wages through the Coronavirus Job Retention Scheme 

It may be possible to operate salary sacrifice as normal if the amount of pay above the furlough pay is sufficient. For example, an employee has a salary sacrifice arrangement in place to sacrifice £50 a week to be paid as a pension contribution. Their total pay in a week is £150, made up of £80 for the period they were working whilst on furlough and £70 furlough pay. Their pay cannot be reduced below £70, so depending upon the contractual agreements between the employer and the employee during the furlough period the £50 sacrifice may be made.

If the amount of pay above the furlough pay is not sufficient, for example the employee’s  total pay in the example above was £100 in the week, then whether or not part of the sacrifice can be made (£30 instead of £50 in this example) will depend on the contractual agreement in place between the employer and employee.

Further information

Coronavirus (COVID-19) main page

Coronavirus Job Retention bonus

Coronavirus Job Retention Scheme

The Pensions Regulator - The duty to consult on scheme changes

HMRC - Claim for wages through the Coronavirus Job Retention Scheme

Note

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.